6-K 1 d676248d6k.htm FORM 6-K Form 6-K
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FORM 6-K

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

Commission File Number: 1-15270

For the month of February 2019

NOMURA HOLDINGS, INC.

(Translation of registrant’s name into English)

9-1, Nihonbashi 1-chome

Chuo-ku, Tokyo 103-8645

Japan

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F      X             Form 40-F              

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):             

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):             

 

 

 

 


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Information furnished on this form:

EXHIBITS

 

Exhibit Number
1.    (English Translation) Quarterly Securities Report Pursuant to the Financial Instruments and Exchange Act for the Nine Months Ended December 31, 2018
2.    (English Translation) Confirmation Letter

The registrant hereby incorporates Exhibits 1 and 2 to this report on Form 6-K by reference in the prospectus that is part of the Registration Statement on Form F-3 (Registration No. 333-229191) of the registrant, filed with the SEC on January 11, 2019.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  NOMURA HOLDINGS, INC.

Date: February 21, 2019

  By:  

/s/ Hajime Ikeda

    Hajime Ikeda
    Senior Managing Director


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Exhibit 1

Quarterly Securities Report Pursuant to the Financial Instruments and Exchange Act for the Nine Months Ended December 31, 2018

Items included in the Quarterly Securities Report

 

     Page  

Part I    Corporate Information

     1  

Item 1. Information on Company and Its Subsidiaries and Affiliates

     1  

1. Selected Financial Data

     1  

2. Business Overview

     1  

Item 2. Operating and Financial Review

     2  

1. Risk Factors

     2  

2. Operating, Financial and Cash Flow Analyses by Management

     3  

3. Significant Contracts

     16  

Item 3. Company Information

     17  

1. Share Capital Information

     17  

2. Directors and Executive Officers

  

Item 4. Financial Information

     20  

Preparation Method of Consolidated Financial Statements and Quarterly Review Certificate

     20  

1. Consolidated Financial Statements

     21  

(1) Consolidated Balance Sheets (UNAUDITED)

     21  

(2) Consolidated Statements of Income (UNAUDITED)

     24  

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

     26  

(4) Consolidated Statements of Changes in Equity (UNAUDITED)

     27  

(5) Consolidated Statements of Cash Flows (UNAUDITED)

     28  

Notes to the Consolidated Financial Statements (UNAUDITED)

     30  

2. Other

     108  

Part II    Information on Guarantor of the Company

  

Quarterly Review Report of Independent Auditors

     109  

 

Note: Translations for the underlined items are attached to this form as below.


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Part I    Corporate Information

Item 1. Information on Company and Its Subsidiaries and Affiliates

1. Selected Financial Data

 

        Nine months
ended
December 31,

2017
    Nine months
ended
December 31,

2018
    Three months
ended
December 31,
2017
    Three months
ended
December 31,
2018
    Year ended
March 31,
2018
 

Total revenue

  (Mil yen)     1,460,944       1,336,766       530,629       457,400       1,972,158  

Net revenue

  (Mil yen)     1,118,932       815,516       406,616       260,597       1,496,969  

Income (loss) before income taxes

  (Mil yen)     281,235       (62,054     120,753       (76,164     328,158  

Net income (loss) attributable to Nomura Holdings, Inc. (“NHI”) shareholders

  (Mil yen)     196,668       (101,286     87,962       (95,276     219,343  

Comprehensive income (loss) attributable to NHI shareholders

  (Mil yen)     175,122       (42,280     64,483       (101,999     126,335  

Total equity

  (Mil yen)     2,905,681       2,706,011       —         —         2,799,824  

Total assets

  (Mil yen)     44,224,391       45,113,023       —         —         40,343,947  

Net income (loss) attributable to NHI shareholders per share—basic

  (Yen)     56.20       (30.01     25.55       (28.52     63.13  

Net income (loss) attributable to NHI shareholders per share—diluted

  (Yen)     55.12       (30.03     25.12       (28.52     61.88  

Total NHI shareholders’ equity as a percentage of total assets

  (%)     6.4       5.9       —         —         6.8  

Cash flows from operating activities

  (Mil yen)     (541,155     (440,760     —         —         (445,690

Cash flows from investing activities

  (Mil yen)     23,274       (2,872     —         —         (56,172

Cash flows from financing activities

  (Mil yen)     326,212       483,207       —         —         373,168  

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

  (Mil yen)     2,357,233       2,439,146       —         —         2,354,868  

 

1

The selected financial data of Nomura Holdings, Inc. (the “Company”) and other entities in which it has a controlling financial interest (collectively referred to as “Nomura”, “we”, “our”, or “us”) are stated in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).

2

Taxable transactions do not include consumption taxes and local consumption taxes.

3

As the consolidated financial statements have been prepared, selected financial data on the Company are not disclosed.

4

Due to the changes in our accounting policy which Nomura adopted on April 1, 2018, certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 1. “Basis of Accounting” for further details.

5

In accordance with Accounting Standard Update (“ASU”) 2016-18Restricted Cash” which Nomura adopted on April 1, 2018, certain reclassification of amounts previously reported as Cash, cash equivalents, restricted cash and restricted cash equivalents and Cash flows from operating activities for the nine months ended December 31, 2017 and for the year ended March 31, 2018 have been made to conform to the current year presentation.

2. Business Overview

There were no significant changes to the businesses of the Company and its 1,276 consolidated subsidiaries for the nine months ended December 31, 2018.

There were 13 affiliated companies which were accounted for by the equity method as of December 31, 2018.

 

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Item 2. Operating and Financial Review

1. Risk Factors

Significant changes in our Risk Factors which were described on the annual securities report are stated below. The titles below correspond to the titles of “Part I Corporate Information—Item 2. Operating and Financial Review—2. Risk Factors” in the annual securities report.

The discussion below contains future matters that are based on the assessments made as of the date of submission of this report (February 14, 2019), unless noted separately.

We may have to recognize impairment charges with regard to the amount of goodwill, tangible and intangible assets recognized on our consolidated balance sheets

We have purchased all or a part of the equity interests in, or operations from, certain other companies in order to pursue our business expansion, and expect to continue to do so when and as we deem appropriate. We account for certain of those and similar purchases and acquisitions as a business combination under U.S. GAAP by allocating our acquisition costs to the assets acquired and liabilities assumed and recognizing the remaining amount as goodwill. We also possess tangible and intangible assets other than those stated above.

We may have to recognize impairment charges, as well as other losses associated with subsequent transactions, with regard to the amount of goodwill, tangible and intangible assets and, if recognized, such changes may adversely affect our financial condition and results of operations. For example, during the nine months ended December 31, 2018, we recognized an impairment loss on goodwill of ¥81,372 million.

Our business is subject to substantial legal, regulatory and reputational risks

Extensive regulation of our businesses limits our activities and may subject us to significant penalties and losses

The financial services industry is subject to extensive regulation. We are subject to increasing regulation by governmental and self-regulatory organizations in Japan and in virtually all other jurisdictions in which we operate, and such governmental and regulatory scrutiny may increase as our operations expand or as laws change. In addition, while regulatory complexities increase, possibilities of extra-territorial application of a regulation in one jurisdiction to business activities outside of such jurisdiction may also increase. These regulations are broadly designed to ensure the stability of financial systems and the integrity of the financial markets and financial institutions, and to protect clients and other third parties who deal with us, and often limit our activities and/or affect our profitability, through net capital, client protection and market conduct requirements. In addition, on top of traditional finance-related legislation, the scope of laws and regulations applying to, and/or impacting on, our operations may become wider depending on the situation of the wider international political and economic environment or policy approaches taken by governmental authorities in respect of regulatory application or law enforcement. In particular, the number of investigations and proceedings against the financial services industry by governmental and self-regulatory organizations has increased substantially and the consequences of such investigations and proceedings have become more severe in recent years, and we are subject to face the risk of such investigations and proceedings. For example, the U.S. Department of Justice (the “DOJ”) conducted an investigation regarding residential mortgage-backed securities securitized by some of our U.S. subsidiaries prior to 2009. On October 15, 2018, the U.S. subsidiaries settled the investigation with the DOJ and agreed to pay USD 480 million. Although we have policies in place to prevent violations of such laws and regulations, we may not always be able to prevent violations, and we could be fined, prohibited from engaging in some of our business activities, ordered to improve our internal governance procedures or be subject to revocation of our license to conduct business. Our reputation could also suffer from the adverse publicity that any administrative or judicial sanction against us may create, which may negatively affect our business opportunities and ability to secure human resources. As a result of any such sanction, we may lose business opportunities for a period of time, even after the sanction is lifted, if and to the extent that our clients, especially public institutions, decide not to engage us for their financial transactions. In addition, certain market participants may refrain from investing in or entering into transactions with us if we engage in business activities in regions subject to international sanctions, even if our activities do not constitute violations of sanctions laws and regulations.

 

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2. Operating, Financial and Cash Flow Analysis by Management

(1) Operating Results

Nomura reported net revenue of ¥815.5 billion, non-interest expenses of ¥877.6 billion, partly due to a loss of ¥81.4 billion from the goodwill impairment attributable to Wholesale as a result of its assessment as of December 31, 2018, loss before income taxes of ¥62.1 billion, and net loss attributable to NHI shareholders of ¥101.3 billion for the nine months ended December 31, 2018.

The breakdown of net revenue and non-interest expenses on the consolidated statements of income are as follows:

 

     Millions of yen  
     Nine months ended December 31  
     2017     2018  

Commissions

   ¥ 277,947     ¥ 226,954  

Brokerage commissions

     190,994       159,971  

Commissions for distribution of investment trust

     66,205       44,906  

Other

     20,748       22,077  

Fees from investment banking

     79,079       76,207  

Underwriting and distribution

     33,975       46,246  

M&A / financial advisory fees

     30,235       20,219  

Other

     14,869       9,742  

Asset management and portfolio service fees

     183,322       186,312  

Asset management fees

     170,169       174,345  

Other

     13,153       11,967  

Net gain on trading

     296,583       244,586  

Gain (loss) on private equity investments

     (2,352     1,335  

Net interest

     95,437       51,585  

Gain (loss) on investments in equity securities

     7,654       (8,864

Other

     181,262       37,401  
  

 

 

   

 

 

 

Net revenue

   ¥ 1,118,932     ¥ 815,516  
  

 

 

   

 

 

 
     Millions of yen  
     Nine months ended December 31  
     2017     2018  

Compensation and benefits

   ¥ 389,656     ¥ 372,428  

Commissions and floor brokerage

     74,269       64,335  

Information processing and communications

     140,881       123,232  

Occupancy and related depreciation

     51,070       48,692  

Business development expenses

     26,033       27,354  

Other

     155,788       241,529  
  

 

 

   

 

 

 

Non-interest expenses

   ¥ 837,697     ¥ 877,570  
  

 

 

   

 

 

 

 

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Business Segment Information

Results by business segment are noted below.

Reconciliations of Net revenue and Income (loss) before income taxes on segment results of operations and the consolidated statements of income are set forth in Item 4. Financial Information, 1. Consolidated Financial Statements, Note 16. “Segment and geographic information.

Net revenue

 

     Millions of yen  
     Nine months ended December 31  
     2017      2018  

Retail

   ¥ 314,754      ¥ 265,325  

Asset Management

     100,018        66,948  

Wholesale

     503,927        413,148  

Other (Incl. elimination)

     193,340        79,117  
  

 

 

    

 

 

 

Total

   ¥ 1,112,039      ¥ 824,538  
  

 

 

    

 

 

 
Non-interest expenses      
     Millions of yen  
     Nine months ended December 31  
     2017      2018  

Retail

   ¥ 233,028      ¥ 219,136  

Asset Management

     45,148        47,191  

Wholesale

     447,545        511,532  

Other (Incl. elimination)

     111,976        99,711  
  

 

 

    

 

 

 

Total

   ¥ 837,697      ¥ 877,570  
  

 

 

    

 

 

 
Income (loss) before income taxes      
     Millions of yen  
     Nine months ended December 31  
     2017      2018  

Retail

   ¥ 81,726      ¥ 46,189  

Asset Management

     54,870        19,757  

Wholesale

     56,382        (98,384

Other (Incl. elimination)

     81,364        (20,594
  

 

 

    

 

 

 

Total

   ¥ 274,342      ¥ (53,032
  

 

 

    

 

 

 

Retail

Net revenue was ¥265.3 billion, a decline from the same period in the prior year primarily due to bear market weighed on investor sentiment. Non-interest expenses were ¥219.1 billion and income before income taxes was ¥46.2 billion. Retail client assets were ¥110.0 trillion as of December 31, 2018, a ¥7.7 trillion decrease from March 31, 2018.

Asset Management

Net revenue was ¥66.9 billion, a decline from the same period in the prior year against the backdrop of the decrease of gain and loss related to American Century Investments. Non-interest expenses were ¥47.2 billion and income before income taxes was ¥19.8 billion. Assets under management were ¥48.3 trillion as of December 31, 2018, a ¥1.7 trillion decrease from March 31, 2018, primarily due to decline in the market.

 

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Wholesale

Net revenue was ¥413.1 billion. Non-interest expenses were ¥511.5 billion, partly due to a loss of ¥81.0 billion from the goodwill impairment attributable to Wholesale, and loss before income taxes was ¥98.4 billion.

The breakdown of net revenue for Wholesale is as follows.

 

     Millions of yen  
     Nine months ended December 31  
     2017      2018  

Global Markets

   ¥ 423,170      ¥ 339,441  

Investment Banking

     80,757        73,707  
  

 

 

    

 

 

 

Net revenue

   ¥    503,927      ¥ 413,148   
  

 

 

    

 

 

 

Global Markets net revenue was ¥339.4 billion. Fixed Income net revenue decreased from ¥245.9 billion in the previous year to ¥164.8 billion because of uncertain markets which led to a tough environment for the trading business. Equities net revenue slightly decreased from ¥177.2 billion in the previous year to ¥174.7 billion due to decreasing trading volume in cash equity market in the first half of the year. Investment banking net revenue was ¥73.7 billion.

Nomura established Client Financing and Solutions (“CFS”) in April, 2018. In CFS, Global Markets and Investment Banking co-work and revenue generated from CFS is allocated to Global Markets and Investment Banking in a certain manner. Accordingly, we reclassified a part of net revenue which previously belonged to Global Markets to Investment Banking.

Other Operating Results

Other operating results include net gain (loss) related to economic hedging transactions, realized gain (loss) on investments in equity securities held for operating purposes, equity in earnings of affiliates, corporate items, and other financial adjustments. Other operating results for the nine months ended December 31, 2018 include gains of ¥2.6 billion from changes in the fair value of derivative liabilities attributable to the change in its own creditworthiness and losses of ¥4.1 billion from changes in counterparty credit spread. Net revenue was ¥79.1 billion, non-interest expenses were ¥99.7 billion and loss before income taxes was ¥20.6 billion for the nine months ended December 31, 2018.

Cyber Security Incident

One of our foreign subsidiaries recently experienced a cyber incident that resulted in the unauthorized access to certain of its systems including client information. We may suffer financial loss through reputational damage, legal liability and enforcement actions against us, and expect to incur increased costs for our operations generally, resulting from and in connection with the remediation of this incident and strengthening and enhancing cyber security within other Nomura group companies.

Geographic Information

Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 16. “Segment and geographic information” for net revenue and income (loss) before income taxes by geographic allocation.

Cash Flow Information

Please refer to “(6) Liquidity and Capital Resources.”

 

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(2) Assets and Liabilities Associated with Investment and Financial Services Business

1) Exposure to Certain Financial Instruments and Counterparties

Market conditions continue to impact numerous products to which we have certain exposures. We also have exposures to Special Purpose Entities (“SPEs”) and others in the normal course of business.

Leveraged Finance

We provide loans to clients in connection with leveraged buy-outs and leveraged buy-ins. As this type of financing is usually initially provided through a commitment, we have both funded and unfunded exposures on these transactions.

The following table sets forth our exposure to leveraged finance by geographic location of the target company as of December 31, 2018.

 

     Millions of yen  
     December 31, 2018  
     Funded      Unfunded      Total  

Europe

   ¥ 29,051      ¥ 56,824      ¥ 85,875  

Americas

     31,636        115,552        147,188  

Asia and Oceania

     719        24,287        25,006  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 61,406      ¥ 196,663      ¥ 258,069  
  

 

 

    

 

 

    

 

 

 

Special Purpose Entities

Our involvement with these entities includes structuring, underwriting, as well as, subject to prevailing market conditions, distributing and selling debt instruments and beneficial interests issued by these entities. In the normal course of securitization and equity derivative activities business, we also act as a transferor of financial assets to, and underwriter, distributor and seller of repackaged financial instruments issued by these entities. We retain, purchase and sell variable interests in SPEs in connection with our market-making, investing and structuring activities. Our other types of involvement with SPEs include guarantee agreements and derivative contracts.

For further discussion on Nomura’s involvement with variable interest entities (“VIEs”), see Item 4. Financial Information, 1. Consolidated Financial Statements, Note 7. “Securitizations and Variable Interest Entities.

2) Fair Value of Financial Instruments

A significant amount of our financial instruments are carried at fair value, with changes in fair value recognized through the consolidated statements of income or the consolidated statements of comprehensive income on a recurring basis. Use of fair value is either specifically required under U.S. GAAP or we make an election to use fair value for certain eligible items under the fair value option.

Other financial assets and financial liabilities are carried at fair value on a nonrecurring basis, where the primary measurement basis is not fair value. Fair value is only used in specific circumstances after initial recognition, such as to measure impairment.

In accordance with Accounting Standard Codification (“ASC”) 820 “Fair Value Measurements and Disclosures”, all financial instruments measured at fair value have been categorized into a three-level hierarchy based on the transparency of inputs used to establish fair value.

 

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Level 3 financial assets as a proportion of total financial assets, carried at fair value on a recurring basis was 4% as of December 31, 2018 as listed below:

 

     Billions of yen  
     December 31, 2018  
     Level 1      Level 2      Level 3      Counterparty
and
Cash Collateral
Netting
    Total  

Financial assets measured at fair value (Excluding derivative assets)

   ¥ 9,484      ¥ 8,695      ¥ 613      ¥ —       ¥ 18,792  

Derivative assets

     11        14,475        144        (13,741     889  

Total

   ¥ 9,495      ¥ 23,170      ¥ 757      ¥ (13,741   ¥ 19,681  

Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 2. “Fair value measurements” for further information.

(3) Trading Activities

Assets and liabilities for trading purposes

Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 2. “Fair value measurements” and Note 3. “Derivative instruments and hedging activities” regarding the balances of assets and liabilities for trading purposes.

Risk management of trading activity

We adopt Value at Risk (“VaR”) for measurement of market risk arising from trading activity.

1) Assumptions on VaR

 

   

Confidence Level: 99%

 

   

Holding period: One day

 

   

Consideration of price movement among the products

2) Records of VaR

 

     Billions of yen  
     March 31, 2018     December 31, 2018  

Equity

   ¥ 1.2     ¥ 1.1  

Interest rate

     3.1       3.5  

Foreign exchange

     3.2       1.7  
  

 

 

   

 

 

 

Subtotal

     7.5       6.3  

Diversification benefit

     (1.1     (1.4
  

 

 

   

 

 

 

VaR

   ¥ 6.4     ¥ 4.9  
  

 

 

   

 

 

 

 

     Billions of yen  
     Nine months ended December 31, 2018  
     Maximum(1)
     Minimum(1)
     Average(1)  

VaR

   ¥ 10.6      ¥ 3.1      ¥ 4.6  

 

(1)

Represents the maximum, average and minimum VaR based on all daily calculations over the nine-month period.

 

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(4) Deferred Tax Assets Information

Details of deferred tax assets and liabilities

The following table presents details of deferred tax assets and liabilities reported within Other assetsOther and Other liabilities, respectively, in the consolidated balance sheets as of December 31, 2018.

 

     Millions of yen  
     December 31, 2018  

Deferred tax assets

  

Depreciation, amortization and valuation of fixed assets

   ¥ 19,657  

Investments in subsidiaries and affiliates

     28,329  

Valuation of financial instruments

     77,171  

Accrued pension and severance costs

     25,656  

Other accrued expenses and provisions

     52,904  

Operating losses

     377,903  

Other

     4,349  
  

 

 

 

Gross deferred tax assets

     585,969  

Less—Valuation allowance

     (453,014
  

 

 

 

Total deferred tax assets

     132,955  
  

 

 

 

Deferred tax liabilities

  

Investments in subsidiaries and affiliates

     132,541  

Valuation of financial instruments

     39,636  

Undistributed earnings of foreign subsidiaries

     2,145  

Valuation of fixed assets

     10,275  

Other

     5,992  
  

 

 

 

Total deferred tax liabilities

     190,589  
  

 

 

 

Net deferred tax assets (liabilities)

   ¥ (57,634
  

 

 

 

Calculation method of deferred tax assets

In accordance with U.S. GAAP, we recognize deferred tax assets to the extent we believe that it is more likely than not that a benefit will be realized. A valuation allowance is provided for tax benefits available to us, which are not deemed more likely than not to be realized.

 

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(5) Qualitative Disclosures about Market Risk

1) Risk Management

Nomura defines risks as (i) the potential erosion of Nomura’s capital base due to unexpected losses arising from risks to which its business operations are exposed, such as market risk, credit risk, operational risk and model risk, (ii) liquidity risk, the potential lack of access to funds or higher cost of funding than normal levels due to a deterioration in Nomura’s creditworthiness or deterioration in market conditions, and (iii) business risk, the potential failure of revenues to cover costs due to a deterioration in the earnings environment or a deterioration in the efficiency or effectiveness of its business operations.

A fundamental principle established by Nomura is that all employees shall regard themselves as principals of risk management and appropriately manage these risks. Nomura seeks to promote a culture of proactive risk management throughout all levels of the organization and to limit risks to the confines of its risk appetite. The risk management framework that Nomura uses to manage these risks consists of its risk appetite, risk management governance and oversight, the management of financial resources, the management of all risk classes, and processes to measure and control risks.

2) Global Risk Management Structure

The Board of Directors has established the “Structure for Ensuring Appropriate Business of Nomura Holdings, Inc.” as the Company’s basic principle and set up a framework for managing the risk of loss based on this. In addition, they are continuously making efforts to improve, strengthen and build up our risk management capabilities under this framework. Moreover, the Group Integrated Risk Management Committee (“GIRMC”), upon delegation from the Executive Management Board (“EMB”), has established the Risk Management Policy, describing Nomura’s overall risk management framework including the fundamental risk management principles followed by Nomura.

Market Risk Management

Market risk is the risk of loss arising from fluctuations in the value of financial assets and liabilities (including off-balance sheet items) due to fluctuations in market factors (interest rates, foreign exchange rates, prices of securities and others). Effective management of market risk requires the ability to analyze a complex and evolving portfolio in a constantly changing global market environment, identify problematic trends and ensure that appropriate action is taken in a timely manner.

Nomura uses a variety of statistical risk measurement tools to assess and monitor market risk on an ongoing basis, including, but not limited to, VaR, Stressed VaR (“SVaR”) and Incremental Risk Charge (“IRC”). In addition, Nomura uses sensitivity analysis and stress testing to measure and analyze its market risk. Sensitivities are measures used to show the potential changes to a portfolio due to standard moves in market risk factors. They are specific to each asset class and cannot usually be aggregated across risk factors. Stress testing enables the analysis of portfolio risks or tail risks, including non-linear behaviors and can be aggregated across risk factors at any level of the group hierarchy, from group level to business division, units or desk levels. Market risk is monitored against a set of approved limits, with daily reports and other management information provided to the business units and senior management.

Credit Risk Management

Credit risk is the risk of loss arising from an obligor’s default, insolvency or administrative proceeding which results in the obligor’s failure to meet its contractual obligations in accordance with agreed terms. This includes both on and off-balance sheet exposures. It is also the risk of loss arising through a credit valuation adjustment (“CVA”) associated with deterioration in the creditworthiness of a counterparty.

Nomura manages credit risk on a global basis and on an individual Nomura legal entity basis.

The measurement, monitoring and management of credit risk at Nomura are governed by a set of global policies and procedures. Credit Risk Management (“CRM”), a global function within the Risk Management Division, is responsible for the implementation and maintenance of these policies and procedures. These policies are authorized by the GIRMC and/or Global Risk Strategic Committee (“GRSC”), prescribe the basic principles of credit risk management and set delegated authority which enables CRM personnel to set Credit limits.

Credit risk is managed by CRM together with various global and regional risk committees. This ensures transparency of material credit risks and compliance with established credit limits, the approval of material extensions of credit and the escalation of risk concentrations to appropriate senior management.

 

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CRM operates as a credit risk control function within the Risk Management Division, reporting to the Chief Risk Officer. The process for managing credit risk at Nomura includes:

 

   

Evaluation of likelihood that a counterparty defaults on its payments and obligations;

 

   

Assignment of internal credit ratings to all active counterparties;

 

   

Approval of extensions of credit and establishment of credit limits;

 

   

Measurement, monitoring and management of Nomura’s current and potential future credit exposures;

 

   

Setting credit terms in legal documentation;

 

   

Use of appropriate credit risk mitigants including netting, collateral and hedging.

For regulatory capital calculation purposes, Nomura has been applying the Foundation Internal Rating Based Approach in calculating credit risk weighted asset since the end of March 2011. The Standardized Approach is applied to certain business units or asset types, which are considered immaterial to the calculation of credit risk weighted assets.

The exposure calculation model used for counterparty credit risk management has also been used for the Internal Model Method based exposure calculation for regulatory capital reporting purposes since the end of December 2012.

Operational Risk Management

Operational risk is the risk of loss arising from inadequate or failed internal processes, people, and systems or from external events. It excludes strategic risk (the risk of loss as a result of poor strategic business decisions), but includes the risk of breach of legal and regulatory requirements, and the risk of damage to Nomura’s reputation if caused by an operational risk.

Nomura adopts the industry standard “Three Lines of Defence” for the management of operational risk, comprising the following elements:

 

  1)

1st Line of Defence: The business which owns and manages its risks

 

  2)

2nd Line of Defence: The Operational Risk Management (“ORM”) function, which co-ordinates Nomura’s operational risk framework and its implementation, and provides challenge to the 1st Line of Defence

 

  3)

3rd Line of Defence: Internal Audit, who provide independent assurance

An Operational Risk Management Framework has been established in order to allow Nomura to identify, assess, manage, monitor and report on operational risk. The GIRMC, with delegated authority from the EMB has formal oversight over the management of operational risk.

Nomura uses the Standardized Approach for calculating regulatory capital for operational risk. This involves using a three-year average of gross income allocated to business lines, which is multiplied by a fixed percentage (“Beta Factor”) determined by the Financial Services Agency of Japan (“FSA”), to establish the amount of required operational risk capital.

Model Risk Management

Nomura uses risk models for regulatory and economic capital calculations and valuation models for pricing and sensitivity calculations of positions. Model risk is the risk of loss arising from model errors or incorrect or inappropriate model application with regard to valuation models and risk models. Errors can occur at any point from model assumptions through to implementation. In addition, the quality of model outputs depends on the quality of model parameters and any input data. Even a fundamentally sound model producing accurate outputs consistent with the design objective of the model may exhibit high model risk if it is misapplied or misused. To address these risks, Nomura has established its model risk appetite, which includes a qualitative statement and a quantitative measure. The qualitative statement for model risk specifies that it is expected that models are used correctly and appropriately. The quantitative risk appetite measure is based on Nomura’s assessment of the potential loss arising from model risk.

Nomura has documented policies and procedures in place, approved by the GIRMC and/or GRSC, which define the process and validation requirements for implementing changes to valuation and risk models. Before these models are put into official use, the Model Validation Group (“MVG”) is responsible for validating their integrity and comprehensiveness independently from those who design and build them. All models are also subject to an annual re-approval process by MVG to ensure they remain suitable.

In addition, a Model Performance Monitoring process has been established to identify and assess specific events, that can indicate that a Model is not performing as it should or is potentially unsuitable and to determine what actions (for example, additional validation work) might be necessary. For changes with an impact above certain materiality thresholds, model approval is required.

 

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(6) Liquidity and Capital Resources

Funding and Liquidity Management

Overview

We define liquidity risk as the risk of loss arising from difficulty in securing the necessary funding or from a significantly higher cost of funding than normal levels due to deterioration of the Nomura Group’s creditworthiness or deterioration in market conditions. This risk could arise from Nomura-specific or market-wide events such as inability to access the secured or unsecured debt markets, a deterioration in our credit ratings, a failure to manage unplanned changes in funding requirements, a failure to liquidate assets quickly and with minimal loss in value, or changes in regulatory capital restrictions which may prevent the free flow of funds between different group entities. Our global liquidity risk management policy is based on liquidity risk appetite formulated by the Executive Management Board (“EMB”). Nomura’s liquidity risk management, under market-wide stress and in addition, under Nomura-specific stress, seeks to ensure enough continuous liquidity to meet all funding requirements and unsecured debt obligations across one year and 30-day periods, respectively, without raising funds through unsecured funding or through the liquidation of assets. We are required to meet regulatory notice on the liquidity coverage ratio issued by the FSA.

We have in place a number of liquidity risk management frameworks that enable us to achieve our primary liquidity objective. These frameworks include (1) Centralized Control of Residual Cash and Maintenance of Liquidity Portfolio; (2) Utilization of Unencumbered Assets as Part of Our Liquidity Portfolio; (3) Appropriate Funding and Diversification of Funding Sources and Maturities Commensurate with the Composition of Assets; (4) Management of Credit Lines to Nomura Group Entities; (5) Implementation of Liquidity Stress Tests; and (6) Contingency Funding Plan.

Our EMB has the authority to make decisions concerning group liquidity management. The Chief Financial Officer (“CFO”) has the operational authority and responsibility over our liquidity management based on decisions made by the EMB.

1. Centralized Control of Residual Cash and Maintenance of Liquidity Portfolio.

We centrally control residual cash held at Nomura Group entities for effective liquidity utilization purposes. As for the usage of funds, the CFO decides the maximum amount of available funds, provided without posting any collateral, for allocation within Nomura and the EMB allocates the funds to each business division. Global Treasury monitors usage by businesses and reports to the EMB.

In order to enable us to transfer funds smoothly between group entities, we limit the issuance of securities by regulated broker-dealers or banking entities within the Nomura Group and seek to raise unsecured funding primarily through the Company or through unregulated subsidiaries. The primary benefits of this strategy include cost minimization, wider investor name recognition and greater flexibility in providing funding to various subsidiaries across the Nomura Group.

To meet any potential liquidity requirement, we maintain a liquidity portfolio, managed by Global Treasury apart from other assets, in the form of cash and highly liquid, unencumbered securities that may be sold or pledged to provide liquidity. As of December 31, 2018, our liquidity portfolio was ¥5,033.8 billion which sufficiently met liquidity requirements under the stress scenarios.

2. Utilization of Unencumbered Assets as Part of Our Liquidity Portfolio.

In addition to our liquidity portfolio, we had unencumbered assets comprising mainly of unpledged trading assets that can be used as an additional source of secured funding. Global Treasury monitors other unencumbered assets and can, under a liquidity stress event when the contingency funding plan has been invoked, monetize and utilize the cash generated as a result. The aggregate of our liquidity portfolio and other unencumbered assets was sufficient against our total unsecured debt maturing within one year.

3. Appropriate Funding and Diversification of Funding Sources and Maturities Commensurate with the Composition of Assets

We seek to maintain a surplus of long-term debt and equity above the cash capital requirements of our assets. We also seek to achieve diversification of our funding by market, instrument type, investors, currency, and staggered maturities in order to reduce unsecured refinancing risk.

We diversify funding by issuing various types of debt instruments—these include both structured loans and structured notes with returns linked to interest rates, currencies, equities, commodities, or related indices. We issue structured loans and structured notes in order to increase the diversity of our debt instruments. We typically hedge the returns we are obliged to pay with derivatives and/or the underlying assets to obtain funding equivalent to our unsecured long-term debt.

 

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3.1 Short-Term Unsecured Debt

Our short-term unsecured debt consists of short-term bank borrowings (including long-term bank borrowings maturing within one year), other loans, commercial paper, deposit at banking entities, certificates of deposit and debt securities maturing within one year. Deposits at banking entities and certificates of deposit comprise customer deposits and certificates of deposit of our banking subsidiaries. Short-term unsecured debt includes the current portion of long-term unsecured debt.

The following table presents an analysis of our short-term unsecured debt by type of financial liability as of March 31, 2018 and December 31, 2018.

 

     Billions of yen  
     March 31, 2018      December 31, 2018  

Short-term bank borrowings

   ¥ 143.6      ¥ 46.1  

Other loans

     176.2        224.2  

Commercial paper

     179.3        341.5  

Deposits at banking entities

     925.8        1,038.7  

Certificates of deposit

     11.1        6.1  

Debt securities maturing within one year

     671.0        539.1  
  

 

 

    

 

 

 

Total short-term unsecured debt

   ¥ 2,107.0      ¥ 2,195.7  
  

 

 

    

 

 

 

3.2 Long-Term Unsecured Debt

We meet our long-term capital requirements and also achieve both cost-effective funding and an appropriate maturity profile by routinely funding through long-term debt and diversifying across various maturities and currencies.

Our long-term unsecured debt includes senior and subordinated debt issued through U.S. registered shelf offerings and our U.S. registered medium-term note programs, our Euro medium-term note programs, registered shelf offerings in Japan and various other debt programs.

As a globally competitive financial services group in Japan, we have access to multiple global markets and major funding centers. The Company, Nomura Securities Co. Ltd., Nomura Europe Finance N.V., Nomura Bank International plc, and Nomura International Funding Pte. Ltd. are the main group entities that borrow externally, issue debt instruments and engage in other funding activities. By raising funds to match the currencies and liquidities of our assets or by using foreign exchange swaps as necessary, we pursue optimization of our funding structures.

We use a wide range of products and currencies to ensure that our funding is efficient and well diversified across markets and investor types. Our unsecured senior debt is mostly issued without financial covenants, such as covenants related to adverse changes in our credit ratings, cash flows, results of operations or financial ratios, which could trigger an increase in our cost of financing or accelerate repayment of the debt.

The following table presents an analysis of our long-term unsecured debt by type of financial liability as of March 31, 2018 and December 31, 2018.

 

     Billions of yen  
     March 31, 2018      December 31, 2018  

Long-term deposits at banking entities

   ¥ 214.5      ¥ 231.7  

Long-term bank borrowings

     2,567.6        2,781.7  

Other loans

     118.6        88.9  

Debt securities(1)

     2,318.2        3,457.1  
  

 

 

    

 

 

 

Total long-term unsecured debt

   ¥ 5,218.9      ¥ 6,559.4  
  

 

 

    

 

 

 

 

  (1)

Excludes long-term debt securities issued by consolidated special purpose entities and similar entities that meet the definition of variable interest entities under ASC 810 “Consolidation” and secured financing transactions recognized within Long-term borrowings as a result of transfers of financial assets that are accounted for as financings rather than sales in accordance with ASC 860 “Transfer and Servicing.

 

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3.3 Maturity Profile

We also seek to maintain an average maturity for our plain vanilla debt securities and borrowings greater than or equal to three years. A significant amount of our structured loans and structured notes are linked to interest rates, currencies, equities, commodities, or related indices. These maturities are evaluated based on internal models and monitored by Global Treasury. Where there is a possibility that these may be called prior to their scheduled maturity date, maturities are based on our internal stress option adjusted model. The model values the embedded optionality under stress market conditions in order to determine when the debt securities or borrowings are likely to be called.

3.4 Secured Funding

We typically fund our trading activities through secured borrowings, repurchase agreements and Japanese “Gensaki Repo” transactions. We believe such funding activities in the secured markets are more cost-efficient and less credit-rating sensitive than financing in the unsecured market. Our secured funding capabilities depend on the quality of the underlying collateral and market conditions. While we have shorter term secured financing for highly liquid assets, we seek longer terms for less liquid assets. We also seek to lower the refinancing risks of secured funding by transacting with a diverse group of global counterparties and delivering various types of securities collateral. In addition, we reserve an appropriate level of liquidity portfolio for the refinancing risks of secured funding maturing in the short term for less liquid assets. For more detail of secured borrowings and repurchase agreements, see Note 5 “Collateralized transactions” in our consolidated financial statements.

4. Management of Credit Lines to Nomura Group Entities

We maintain and expand credit lines to Nomura Group entities from other financial institutions to secure stable funding. We ensure that the maturity dates of borrowing agreements are distributed evenly throughout the year in order to prevent excessive maturities in any given period.

5. Implementation of Liquidity Stress Tests

We maintain our liquidity portfolio and monitor the sufficiency of our liquidity based on an internal model which simulates changes in cash outflow under specified stress scenarios to comply with our above mentioned liquidity management policy.

We assess the liquidity requirements of the Nomura Group under various stress scenarios with differing levels of severity over multiple time horizons. We evaluate these requirements under Nomura-specific and broad market-wide events, including potential credit rating downgrades at the Company and subsidiary levels. We call this risk analysis our Maximum Cumulative Outflow (“MCO”) framework.

The MCO framework is designed to incorporate the primary liquidity risks for Nomura and models the relevant future cash flows in the following two primary scenarios:

 

   

Stressed scenario—To maintain adequate liquidity during a severe market-wide liquidity event without raising funds through unsecured financing or through the liquidation of assets for a year; and

 

   

Acute stress scenario—To maintain adequate liquidity during a severe market-wide liquidity event coupled with credit concerns regarding Nomura’s liquidity position, without raising funds through unsecured funding or through the liquidation of assets for 30 days.

We assume that Nomura will not be able to liquidate assets or adjust its business model during the time horizons used in each of these scenarios. The MCO framework therefore defines the amount of liquidity required to be held in order to meet our expected liquidity needs in a stress event to a level we believe appropriate based on our liquidity risk appetite.

As of December 31, 2018, our liquidity portfolio exceeded net cash outflows under the stress scenarios described above.

We constantly evaluate and modify our liquidity risk assumptions based on regulatory and market changes. The model we use in order to simulate the impact of stress scenarios includes the following assumptions:

 

   

No liquidation of assets;

 

   

No ability to issue additional unsecured funding;

 

   

Upcoming maturities of unsecured debt (maturities less than one year);

 

   

Potential buybacks of our outstanding debt;

 

   

Loss of secured funding lines particularly for less liquid assets;

 

   

Fluctuation of funding needs under normal business circumstances;

 

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Cash deposits and free collateral roll-off in a stress event;

 

   

Widening of haircuts on outstanding repo funding;

 

   

Additional collateralization requirements of clearing banks and depositories;

 

   

Drawdown on loan commitments;

 

   

Loss of liquidity from market losses;

 

   

Assuming a two-notch downgrade of our credit ratings, the aggregate fair value of assets that we would be required to post as additional collateral in connection with our derivative contracts; and

 

   

Legal and regulatory requirements that can restrict the flow of funds between entities in the Nomura Group.

6. Contingency Funding Plan

We have developed a detailed contingency funding plan to integrate liquidity risk control into our comprehensive risk management strategy and to enhance the quantitative aspects of our liquidity risk control procedures. As a part of our Contingency Funding Plan (“CFP”), we have developed an approach for analyzing and quantifying the impact of any liquidity crisis. This allows us to estimate the likely impact of both Nomura-specific and market-wide events; and specifies the immediate action to be taken to mitigate any risk. The CFP lists details of key internal and external parties to be contacted and the processes by which information is to be disseminated. This has been developed at a legal entity level in order to capture specific cash requirements at the local level—it assumes that our parent company does not have access to cash that may be trapped at a subsidiary level due to regulatory, legal or tax constraints. We periodically test the effectiveness of our funding plans for different Nomura-specific and market-wide events. We also have access to central banks including, but not exclusively, the Bank of Japan, which provide financing against various types of securities. These operations are accessed in the normal course of business and are an important tool in mitigating contingent risk from market disruptions.

Liquidity Regulatory Framework

In 2008, the Basel Committee published “Principles for Sound Liquidity Risk Management and Supervision.” To complement these principles, the Committee has further strengthened its liquidity framework by developing two minimum standards for funding liquidity. These standards have been developed to achieve two separate but complementary objectives.

The first objective is to promote short-term resilience of a financial institution’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets to survive a significant stress scenario lasting for 30 days. The Committee developed the Liquidity Coverage Ratio (“LCR”) to achieve this objective.

The second objective is to promote resilience over a longer time horizon by creating additional incentives for financial institutions to fund their activities with more stable sources of funding on an ongoing basis. The Net Stable Funding Ratio (“NSFR”) has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities.

These two standards are comprised mainly of specific parameters which are internationally “harmonized” with prescribed values. Certain parameters, however, contain elements of national discretion to reflect jurisdiction-specific conditions.

In Japan, the regulatory notice on the LCR, based on the international agreement issued by the Basel Committee with necessary national revisions, was published by Financial Services Agency (on October 31, 2014). The notices have been implemented since the end of March 2015 with phased-in minimum standards. Average of Nomura’s LCRs for the three months ended December 31, 2018 was 196.7%, and Nomura was compliant with requirements of the above notices. As for the NSFR, it is not yet implemented in Japan.

Cash Flows

Cash, cash equivalents, restricted cash and restricted cash equivalents’ balance as of December 31, 2017 and as of December 31, 2018 were ¥2,357.2 billion and ¥2,439.1 billion, respectively. Cash flows from operating activities for the nine months ended December 31, 2017 and 2018 were outflows of ¥541.2 billion and outflows of ¥440.8 billion due primarily to an increase in Trading assets and private equity investments. Cash flows from investing activities for the nine months ended December 31, 2017 were inflows of ¥23.3 billion due primarily to an increase in Proceeds from sales of office buildings, land, equipment and facilities and for the comparable period in 2018 were outflows of ¥2.9 billion due primarily to Increase in loans receivable at banks, net. Cash flows from financing activities for the nine months ended December 31, 2017 and 2018 were inflows of ¥326.2 billion and inflows of ¥483.2 billion due primarily to an increase in Long-term borrowings.

 

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Balance Sheet and Financial Leverage

Total assets as of December 31, 2018, were ¥45,113.0 billion, an increase of ¥4,769.1 billion compared with ¥40,343.9 billion as of March 31, 2018, primarily due to an increase in Securities purchased under agreements to resell. Total liabilities as of December 31, 2018, were ¥42,407.0 billion, an increase of ¥4,862.9 billion compared with ¥37,544.1 billion as of March 31, 2018, primarily due to an increase in Securities sold under agreements to repurchase. NHI shareholders’ equity as of December 31, 2018, was ¥2,662.9 billion, a decrease of ¥86.4 billion compared with ¥2,749.3 billion as of March 31, 2018, primarily due to a decrease in Retained earnings.

Due to the changes in our accounting policy which Nomura adopted on April 1, 2018, certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 1. “Basis of Accounting” for further details.

We seek to maintain sufficient capital at all times to withstand losses due to extreme market movements. The EMB is responsible for implementing and enforcing capital policies. This includes the determination of our balance sheet size and required capital levels. We continuously review our equity capital base to ensure that it can support the economic risk inherent in our business. There are also regulatory requirements for minimum capital of entities that operate in regulated securities or banking businesses.

As leverage ratios are commonly used by other financial institutions similar to us, we voluntarily provide a Leverage ratio and Adjusted leverage ratio primarily for benchmarking purposes so that users of our annual report can compare our leverage against other financial institutions. Adjusted leverage ratio is a non-GAAP financial measure that Nomura considers to be a useful supplemental measure of leverage.

The following table sets forth NHI shareholders’ equity, total assets, adjusted assets and leverage ratios:

 

     Billions of yen, except ratios  
     March 31, 2018     December 31, 2018  

NHI shareholders’ equity

   ¥ 2,749.3     ¥ 2,662.9  

Total assets

     40,343.9       45,113.0  

Adjusted assets(1)

     24,106.2       26,489.9  

Leverage ratio(2)

     14.7     16.9

Adjusted leverage ratio(3)

     8.8     9.9

 

(1)

Represents total assets less Securities purchased under agreements to resell and Securities borrowed. Adjusted assets is a non-GAAP financial measure and is calculated as follows:

 

     Billions of yen  
     March 31, 2018     December 31, 2018  

Total assets

   ¥ 40,343.9       ¥ 45,113.0    

Less:

    

Securities purchased under agreements to resell

     9,853.9       14,549.2  

Securities borrowed

     6,383.8       4,073.9  
  

 

 

   

 

 

 

Adjusted assets

   ¥ 24,106.2     ¥ 26,489.9  
  

 

 

   

 

 

 

 

(2)

Equals total assets divided by NHI shareholders’ equity.

(3)

Equals adjusted assets divided by NHI shareholders’ equity.

Total assets increased by 11.8%, primarily due to an increase in Securities purchased under agreements to resell. NHI shareholders’ equity decreased by 3.1%, primarily due to a decrease in Retained earnings. As a result, our leverage ratio rose from 14.7 times as of March 31, 2018 to 16.9 times as of December 31, 2018.

Adjusted assets increased primarily due to an increase in Trading assets. As a result, our adjusted leverage ratio rose from 8.8 times as of March 31, 2018 to 9.9 times as of December 31, 2018.

 

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Consolidated Regulatory Capital Requirements

The FSA established the “Guideline for Financial Conglomerates Supervision” (“Financial Conglomerates Guideline”) in June 2005 and set out the rules on consolidated regulatory capital. We started monitoring our consolidated capital adequacy ratio in accordance with the Financial Conglomerates Guideline from April 2005.

The Company has been assigned by the FSA as a Final Designated Parent Company who must calculate a consolidated capital adequacy ratio according to the Capital Adequacy Notice on Final Designated Parent Company in April 2011. Since then, we have been calculating our consolidated capital adequacy ratio according to the Capital Adequacy Notice on Final Designated Parent Company. The Capital Adequacy Notice on Final Designated Parent Company has been revised to be in line with Basel 2.5 and Basel III since then. We have calculated a Basel III-based consolidated capital adequacy ratio from the end of March 2013. Basel 2.5 includes significant change in calculation method of market risk and Basel III includes redefinition of capital items for the purpose of requiring higher quality of capital and expansion of the scope of credit risk-weighted assets calculation.

In accordance with Article 2 of the Capital Adequacy Notice on Final Designated Parent Company, our consolidated capital adequacy ratio is currently calculated based on the amounts of common equity Tier 1 capital, Tier 1 capital (sum of common equity Tier 1 capital and additional Tier 1 capital), total capital (sum of Tier 1 capital and Tier 2 capital), credit risk-weighted assets, market risk and operational risk. As of December 31, 2018, our common equity Tier 1 capital ratio (common equity Tier 1 capital divided by risk-weighted assets) was 17.91%, Tier 1 capital ratio (Tier 1 capital divided by risk-weighted assets) was 19.11% and consolidated capital adequacy ratio (total capital divided by risk-weighted assets) was 19.55% and we were in compliance with the requirement for each ratio set out in the Capital Adequacy Notice on Final Designated Parent Company (required level as of December 31, 2018 was 6.83% for common equity Tier 1 capital ratio, 8.33% for Tier 1 capital ratio and 10.33% for consolidated capital adequacy ratio).

The following table presents the Company’s consolidated capital adequacy ratios as of December 31, 2018.

 

     Billions of yen, except ratios  
     December 31, 2018  

Common equity Tier 1 capital

   ¥ 2,471.8  

Tier 1 capital

     2,637.9  

Total capital

     2,699.1  

Risk-Weighted Assets

  

Credit risk-weighted assets

     6,715.2  

Market risk equivalent assets

     4,551.1  

Operational risk equivalent assets

     2,532.8  
  

 

 

 

Total risk-weighted assets

   ¥ 13,799.1  
  

 

 

 

Consolidated Capital Adequacy Ratios

  

Common equity Tier 1 capital ratio

     17.91

Tier 1 capital ratio

     19.11

Consolidated capital adequacy ratio

     19.55

Consolidated Leverage Ratio Requirements

In March 2015, the FSA set out requirements for the calculation and disclosure of a consolidated leverage ratio, through amendments to revising “Specification of items which a final designated parent company should disclose on documents to show the status of its sound management” (2010 FSA Regulatory Notice No. 132; “Notice on Pillar 3 Disclosure”) and the publication of “Consolidated Leverage Ratio prescribed by Commissioner of Financial Services Agency in accordance with Article 3, paragraph 1 of Pillar 3 Notice” (2015 FSA Regulatory Notice No. 11; “Notice on Consolidated Leverage Ratio”). We started calculating and disclosing a consolidated leverage ratio from March 31, 2015 in accordance with the Notice on Pillar 3 Disclosure and Notice on Consolidated Leverage Ratio. Management receives and reviews this consolidated leverage ratio on a regular basis. As of December 31, 2018, our consolidated leverage ratio was 4.45%.

(7) Current Challenges

There is no significant change to our current challenges nor new challenges for the nine months ended December 31, 2018 and until the submission date of this report.

3. Significant Contracts

Not applicable.

 

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Item 3. Company Information

1. Share Capital Information

(1) Total Number of Shares

A. Number of Authorized Share Capital

 

Type

   Authorized Share Capital
(shares)
 

Common stock

     6,000,000,000  

Class 1 preferred stock

     200,000,000  

Class 2 preferred stock

     200,000,000  

Class 3 preferred stock

     200,000,000  

Class 4 preferred stock

     200,000,000  
  

 

 

 

Total

     6,000,000,000  
  

 

 

 

 

The “Authorized Share Capital” is stated by the type of stock and the “Total” is the number of authorized share capital as referred in the Articles of Incorporation.

B. Issued Shares

 

Type

   Number of
Issued Shares as of
December 31, 2018
     Number of
Issued Shares as of
February 14, 2019
     Trading Markets   Details  

Common stock

     3,493,562,601        3,493,562,601      Tokyo Stock Exchange(2)     1 unit is 100 shares  
         Nagoya Stock Exchange(2)  
         Singapore Exchange  
         New York Stock Exchange  
  

 

 

    

 

 

    

 

 

 

 

 

Total

     3,493,562,601        3,493,562,601      —       —    
  

 

 

    

 

 

    

 

 

 

 

 

 

(1)

Shares that may have increased from exercise of stock options between February 1, 2019 and the submission date (February 14, 2019) are not included in the number of issued shares as of the submission date.

(2)

Listed on the First Section of each stock exchange.

 

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(2) Stock Acquisition Rights

A. Stock option

Stock acquisition rights issued during the three months ended December 31, 2018 are as follows:

 

Stock Acquisition Rights No. 85

 

Date of Resolution

  October 30, 2018

Number of Stock Acquisition Right

  25,565
Number of Stock Acquisition Right for Treasury (out of above number)   —  

Type of Share under the Stock Acquisition Right

 

Common stock

1 unit is 100 shares

Number of Shares under the Stock Acquisition Rights

  2,556,500
The Amount to be Paid upon Exercising the Stock Acquisition Right(1)   ¥573 per share

Exercise Period of the Stock Acquisition Right

  From November 20, 2020 to November 19, 2025
Issue Price of Shares and Capital Inclusion Price if Shares are Issued upon Exercise of the Stock Acquisition Rights  

Issue Price of Shares ¥573

Capital Inclusion Price ¥329

Conditions to Exercise of Stock Acquisition Right

  No Stock Acquisition Right may be exercised partially.

Restriction of Transfer of Stock Acquisition Rights

  Any assignment of stock acquisition rights shall be subject to approval by resolution adopted by the Board of Directors of the Company.

Substituted Payment

  —  

Issue of the Stock Acquisition Right Attendant on Reorganization

  —  

In the event that the shares are split or consolidated, the Exercise Price shall be adjusted in accordance with the following formula, and any fractions less than one (1) yen shall be rounded up to the nearest yen.

 

Adjusted Exercise Price = Exercise Price before Adjustment

   x    

1

  
           Ratio of Split or Consolidation           

In the event that the Company offers for subscription of the issuance of the new shares of common stock or the disposal of treasury shares of common stock of the Company at a paid-in amount below the market price of the common stock of the Company which is used in the adjustment formula for the Exercise Price (excluding Stock Acquisition Rights (including those attached to bonds with stock subscription rights) which is able to request for the delivery of the common shares of the Company and any other securities or the conversion, replacement or the exercise of the Stock Acquisition Rights and any request for purchase of additional less-than-a-full-unit shares) or in the event of the shares with acquisition request right that the Company issues the common stock of the Company in exchange of its acquisition as prescribed at a compensation below the market price of the common stock of the Company which is used in the adjustment formula for the Exercise Price (including the grant without any consideration), or in the event that the Company issues the stock acquisition right which is able to request for the delivery of the common stock of the Company (including those attached to bonds with stock subscription rights) and any other securities or rights (including the grant without any consideration) at a compensation below the market price of the common stock of the Company which is used in the adjustment formula for the Exercise Price, the Exercise Price shall be adjusted in accordance with the following formula, and any fraction of less than one (1) yen resulting from the adjustment shall be rounded up to the nearest yen.

 

Adjusted

Exercise

Price

    
 = 
 
 
   Exercise Price

before

Adjustment

      x         Number of Outstanding Shares        +     

Number of Shares to be Delivered x Paid-in Amount Per Share

   Market Price per Share
  

 

 

Number of (Outstanding + Shares to be Delivered)

B. Other stock acquisition rights

Not applicable in this quarter.

 

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(3) Exercise of Moving Strike Bonds with Subscription Warrant

None

(4) Changes in Issued Shares, Shareholders’ Equity, etc.

 

                  Millions of yen  

Date

   Increase/Decrease of
Issued Shares
    Total
Issued Shares
     Increase/Decrease
of Shareholders’
Equity—
Common stock
     Shareholders’
Equity—
Common stock
     Increase/Decrease of
Additional

capital reserve
     Additional
capital reserve
 

December 17, 2018

     (150,000,000     3,493,562,601        —          594,493        —          559,676  

 

The decrease of issued shares is due to cancellation of treasury stock.

(5) Major Shareholders

Not applicable as this is the third quarter.

(6) Voting Rights

The “Voting Rights” as of the end of the current third quarter is presented as of September 30, 2018, the most recent cutoff date, because the number of beneficiary shareholders as of December 31, 2018, could not be ascertained.

A. Outstanding Shares

 

     As of September 30, 2018
     Number of Shares      Number of Votes      Description

Stock without voting right

       —          —        —  

Stock with limited voting right (Treasury stocks, etc.)

       —          —        —  

Stock with limited voting right (Others)

       —          —        —  

Stock with full voting right (Treasury stocks, etc.)

     (Treasury Stocks        
     Common stock       260,740,900        —        —  
     (Crossholding Stocks        
     Common stock       1,005,000        —        —  

Stock with full voting right (Others)

     Common stock       3,380,245,200        33,802,452      —  

Shares less than 1 unit

     Common stock       1,571,501        —        Shares less than 1 unit

(100 shares)

  

 

 

   

 

 

    

 

 

    

 

Total Shares Issued

       3,643,562,601        —        —  
  

 

 

   

 

 

    

 

 

    

 

Voting Rights of Total Shareholders

       —          33,802,452      —  
  

 

 

   

 

 

    

 

 

    

 

 

2,000 shares held by Japan Securities Depository Center, Inc. are included in “Stock with full voting right (Others).” 89 shares of treasury stocks are included in “Shares less than 1 unit.”

150,000,000 shares of treasury stock were cancelled on December 17, 2018. As a result of the cancellation, the total issued shares as of December 31, 2018 are 3,493,562,601.

B. Treasury Stocks

 

Name

 

Address

  As of September 30, 2018  
  Directly
held
shares
    Indirectly
held
shares
    Total     Percentage of
Issued Shares
(%)
 

(Treasury Stocks)

         

Nomura Holdings, Inc.

 

1-9-1, Nihonbashi, Chuo-ku,

Tokyo, Japan

    260,740,900       —         260,740,900       7.16  

(Crossholding Stocks)

         

Nomura Real Estate Development Co., Ltd.

 

1-26-2, Nishishinjuku,

Shinjuku-ku, Tokyo, Japan

    1,000,000       —         1,000,000       0.03  

Nomura Japan Corporation.

 

2-1-3, Nihonbashihoridomecho,

Chuo-ku, Tokyo, Japan

    5,000       —         5,000       0.00  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      261,745,900       —         261,745,900       7.18  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

Number of treasury stocks as of December 31, 2018 is 185,500,141 shares due mainly to cancellation of 150,000,000 shares of treasury stock conducted on December 17, 2018.

 

19


Table of Contents

Item 4. Financial Information

 

1

Preparation Method of Consolidated Financial Statements

 

  (1)

The consolidated financial statements have been prepared in accordance with accounting principles, procedures, and presentations which are required in order to issue American Depositary Shares, i.e., U.S. generally accepted accounting principles, pursuant to Article 95 of “Regulations Concerning the Terminology, Forms and Preparation Methods of Quarterly Consolidated Financial Statements” (Cabinet Office Ordinance No. 64, 2007).

 

  (2)

The consolidated financial statements have been prepared by making necessary adjustments to the financial statements of each consolidated company which were prepared in accordance with the accounting principles generally accepted in each country. Such adjustments have been made to comply with the principles noted in (1) above.

 

2

Quarterly Review Certificate

Under Article 193-2 Section 1 of the Financial Instruments and Exchange Act, Ernst & Young ShinNihon LLC performed a quarterly review of the consolidated financial statements for the nine and three months ended December 31, 2018.

<Note>

Although Ernst & Young ShinNihon LLC reported that they applied limited procedures in accordance with professional standards in Japan on the interim consolidated financial statements, prepared in Japanese for the nine and three months ended December 31, 2018, they have not performed any such limited procedures nor have they performed an audit on the English translated version of the consolidated financial statements for the above-mentioned periods which are included in this report on Form 6-K.

 

20


Table of Contents

1. Consolidated Financial Statements

(1) Consolidated Balance Sheets (UNAUDITED)

 

            Millions of yen  
     Notes      March 31,
2018
    December 31,
2018
 

ASSETS

                        

Cash and cash deposits:

       

Cash and cash equivalents

      ¥ 2,354,639     ¥ 2,438,649  

Time deposits

        315,445       347,166  

Deposits with stock exchanges and other segregated cash

        288,962       294,663  
     

 

 

   

 

 

 

Total cash and cash deposits

        2,959,046       3,080,478  
     

 

 

   

 

 

 

Loans and receivables:

       

Loans receivable (including ¥554,137 million and ¥643,115 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2, 8        2,462,503       2,373,851  

Receivables from customers (including ¥13 million and ¥8,388 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2, 4        442,343       408,918  

Receivables from other than customers

        973,867       1,093,348  

Allowance for doubtful accounts

     *8        (3,514     (3,941
     

 

 

   

 

 

 

Total loans and receivables

        3,875,199       3,872,176  
     

 

 

   

 

 

 

Collateralized agreements:

       

Securities purchased under agreements to resell (including ¥1,186,096 million and ¥571,099 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2        9,853,898       14,549,228  

Securities borrowed

        6,383,845       4,073,886  
     

 

 

   

 

 

 

Total collateralized agreements

        16,237,743       18,623,114  
     

 

 

   

 

 

 

Trading assets and private equity investments:

       

Trading assets (including securities pledged as collateral of ¥5,486,551 million and ¥7,049,715 million as of March 31, 2018 and December 31, 2018, respectively; including ¥7,047 million and ¥8,382 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2, 3        14,962,690       17,520,795  

Private equity investments (including ¥4,416 million and ¥4,285 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2        17,466       15,754  
     

 

 

   

 

 

 

Total trading assets and private equity investments

        14,980,156       17,536,549  
     

 

 

   

 

 

 

Other assets:

       

Office buildings, land, equipment and facilities (net of accumulated depreciation and amortization of ¥397,834 million and ¥425,398 million as of March 31, 2018 and December 31, 2018, respectively)

        338,984       321,930  

Non-trading debt securities

     *2        485,891       457,534  

Investments in equity securities

     *2        150,760       135,624  

Investments in and advances to affiliated companies

     *8        408,034       416,424  

Other (including ¥176,029 million and ¥158,733 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2, 10        908,134       669,194  
     

 

 

   

 

 

 

Total other assets

        2,291,803       2,000,706  
     

 

 

   

 

 

 

Total assets

      ¥   40,343,947     ¥   45,113,023  
     

 

 

   

 

 

 

 

21


Table of Contents

(1) Consolidated Balance Sheets—(Continued) (UNAUDITED)

 

     Notes      Millions of yen  
     March 31,
2018
    December 31,
2018
 

LIABILITIES AND EQUITY

                        

Short-term borrowings (including ¥372,188 million and ¥303,215 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2      ¥ 743,497     ¥ 808,262  

Payables and deposits:

       

Payables to customers

     *4        1,176,773       1,180,941  

Payables to other than customers

        1,239,540       1,257,743  

Deposits received at banks

     *2        1,151,342       1,276,438  
     

 

 

   

 

 

 

Total payables and deposits

        3,567,655       3,715,122  
     

 

 

   

 

 

 

Collateralized financing:

       

Securities sold under agreements to repurchase (including ¥435,905 million and ¥168,402 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2        14,759,010       19,982,480  

Securities loaned (including ¥133,375 million and ¥122,251 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2        1,524,363       1,295,494  

Other secured borrowings

        413,621       432,460  
     

 

 

   

 

 

 

Total collateralized financing

        16,696,994       21,710,434  
     

 

 

   

 

 

 

Trading liabilities

     *2, 3        8,202,936       7,691,892  

Other liabilities (including ¥25,482 million and ¥14,702 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2, 10        950,534       738,472  

Long-term borrowings (including ¥2,857,835 million and ¥3,207,139 million measured at fair value by applying the fair value option as of March 31, 2018 and December 31, 2018, respectively)

     *2        7,382,507       7,742,830  
     

 

 

   

 

 

 

Total liabilities

        37,544,123       42,407,012  
     

 

 

   

 

 

 

Commitments and contingencies

     *15       

Equity:

       

Nomura Holdings, Inc. (“NHI”) shareholders’ equity:

       

Common stock

       

No par value share

       

Authorized—6,000,000,000 shares as of March 31, 2018 and December 31, 2018

       

Issued—3,643,562,601 shares as of March 31, 2018 and 3,493,562,601 shares as of December 31, 2018

       

Outstanding—3,392,937,486 shares as of March 31, 2018 and 3,307,712,460 shares as of December 31, 2018

        594,493       594,493  

Additional paid-in capital

        675,280       683,525  

Retained earnings

        1,696,890       1,496,085  

Accumulated other comprehensive income

     *14        (59,356     (350
     

 

 

   

 

 

 

Total NHI shareholders’ equity before treasury stock

        2,907,307       2,773,753  

Common stock held in treasury, at cost—250,625,115 shares as of March 31, 2018 and 185,850,141 shares as of December 31, 2018

        (157,987     (110,810
     

 

 

   

 

 

 

Total NHI shareholders’ equity

        2,749,320       2,662,943  
     

 

 

   

 

 

 

Noncontrolling interests

        50,504       43,068  

Total equity

        2,799,824       2,706,011  
     

 

 

   

 

 

 

Total liabilities and equity

      ¥   40,343,947     ¥   45,113,023  
     

 

 

   

 

 

 

 

22


Table of Contents

(1) Consolidated Balance Sheets—(Continued) (UNAUDITED)

The following table presents the classification of consolidated variable interest entities’ (“VIEs”) assets and liabilities included in the consolidated balance sheets above. The assets of a consolidated VIE may only be used to settle obligations of that VIE. Creditors do not typically have any recourse to Nomura beyond the assets held in the VIEs. See Note 7 “Securitizations and Variable Interest Entities” for further information.

 

            Billions of yen  
    

          

     March 31,
2018
    December 31,
2018
 

Cash and cash deposits

                       ¥ 23     ¥ 16  

Trading assets and private equity investments

        1,186       1,243  

Other assets

        91       93  
     

 

 

   

 

 

 

Total assets

                      ¥            1,300      ¥            1,352   
     

 

 

   

 

 

 

Trading liabilities

      ¥ 22     ¥ 26  

Other liabilities

        2       3  

Borrowings

        953       985  
     

 

 

   

 

 

 

Total liabilities

      ¥ 977     ¥ 1,014  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

23


Table of Contents

(2) Consolidated Statements of Income (UNAUDITED)

 

     Notes      Millions of yen  
     Nine months ended December 31  
     2017     2018  

Revenue:

       

Commissions

     *4      ¥ 277,947     ¥        226,954  

Fees from investment banking

     *4        79,079       76,207  

Asset management and portfolio service fees

     *4        183,322       186,312  

Net gain on trading

     *2, 3        296,583       244,586  

Gain (loss) on private equity investments

        (2,352     1,335  

Interest and dividends

        437,449       572,835  

Gain (loss) on investments in equity securities

        7,654       (8,864

Other

     *4        181,262       37,401  
     

 

 

   

 

 

 

Total revenue

        1,460,944       1,336,766  

Interest expense

        342,012       521,250  
     

 

 

   

 

 

 

Net revenue

        1,118,932       815,516  
     

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

        389,656       372,428  

Commissions and floor brokerage

     *4        74,269       64,335  

Information processing and communications

        140,881       123,232  

Occupancy and related depreciation

        51,070       48,692  

Business development expenses

        26,033       27,354  

Other

     *10        155,788       241,529  
     

 

 

   

 

 

 

Total non-interest expenses

        837,697       877,570  
     

 

 

   

 

 

 

Income (loss) before income taxes

        281,235       (62,054

Income tax expense

     *13        79,788       36,331  
     

 

 

   

 

 

 

Net income (loss)

      ¥        201,447     ¥ (98,385

Less: Net income attributable to noncontrolling interests

        4,779       2,901  
     

 

 

   

 

 

 

Net income (loss) attributable to NHI shareholders

      ¥ 196,668     ¥ (101,286
     

 

 

   

 

 

 
     Notes      Yen  
     Nine months ended December 31  
     2017     2018  

Per share of common stock:

     *11       

Basic—

                      

Net income (loss) attributable to NHI shareholders per share

      ¥ 56.20     ¥ (30.01

Diluted—

       

Net income (loss) attributable to NHI shareholders per share

      ¥ 55.12     ¥ (30.03

The accompanying notes are an integral part of these consolidated financial statements.

 

24


Table of Contents
     Notes      Millions of yen  
     Three months ended December 31  
     2017     2018  

Revenue:

       

Commissions

     *4      ¥        101,655     ¥          72,715  

Fees from investment banking

     *4        29,289       33,129  

Asset management and portfolio service fees

     *4        63,767       60,591  

Net gain on trading

     *2, 3        87,725       96,947  

Gain (loss) on private equity investments

        (2,381     461  

Interest and dividends

        161,445       214,542  

Gain (loss) on investments in equity securities

        4,532       (9,852

Other

     *4        84,597       (11,133
     

 

 

   

 

 

 

Total revenue

        530,629       457,400  

Interest expense

        124,013       196,803  
     

 

 

   

 

 

 

Net revenue

        406,616       260,597  
     

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

        131,372       118,928  

Commissions and floor brokerage

     *4        25,252       23,821  

Information processing and communications

        49,049       41,756  

Occupancy and related depreciation

        16,805       15,852  

Business development expenses

        9,801       9,121  

Other

     *10        53,584       127,283  
     

 

 

   

 

 

 

Total non-interest expenses

        285,863       336,761  
     

 

 

   

 

 

 

Income (loss) before income taxes

        120,753       (76,164

Income tax expense

     *13        30,960       19,698  
     

 

 

   

 

 

 

Net income (loss)

      ¥ 89,793     ¥ (95,862

Less: Net income (loss) attributable to noncontrolling interests

        1,831       (586
     

 

 

   

 

 

 

Net income (loss) attributable to NHI shareholders

      ¥ 87,962     ¥ (95,276
     

 

 

   

 

 

 
     Notes      Yen  
     Three months ended December 31  
     2017     2018  

Per share of common stock:

     *11       

Basic—

                      

Net income (loss) attributable to NHI shareholders per share

      ¥ 25.55     ¥ (28.52

Diluted—

       

Net income (loss) attributable to NHI shareholders per share

      ¥ 25.12     ¥ (28.52

The accompanying notes are an integral part of these consolidated financial statements.

 

25


Table of Contents

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

 

            Millions of yen  
            Nine months ended December 31  
            2017     2018  

Net income (loss)

      ¥      201,447     ¥ (98,385

Other comprehensive income (loss):

                        

Cumulative translation adjustments:

       

Cumulative translation adjustments

        (29,831     35,040  

Deferred income taxes

        13,335       (1,702
     

 

 

   

 

 

 

Total

        (16,496     33,338  

Defined benefit pension plans:

       

Pension liability adjustment

        1,124       2,039  

Deferred income taxes

        (336     (995
     

 

 

   

 

 

 

Total

        788       1,044  

Non-trading securities:

       

Net unrealized gain on non-trading securities

        2,165       —    

Deferred income taxes

        (539     —    
     

 

 

   

 

 

 

Total

        1,626       —    
     

 

 

   

 

 

 

Own credit adjustments:

       

Own credit adjustments:

        (7,197     31,350  

Deferred income taxes

        1,021       (5,982
     

 

 

   

 

 

 

Total

        (6,176     25,368  
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        (20,258     59,750  
     

 

 

   

 

 

 

Comprehensive income (loss)

      ¥ 181,189     ¥ (38,635

Less: Comprehensive income attributable to noncontrolling interests

        6,067       3,645  
     

 

 

   

 

 

 

Comprehensive income (loss) attributable to NHI shareholders

      ¥ 175,122     ¥ (42,280
     

 

 

   

 

 

 
            Millions of yen  
            Three months ended December 31  
            2017     2018  

Net income (loss)

      ¥          89,793     ¥ (95,862

Other comprehensive income (loss):

                        

Cumulative translation adjustments:

       

Cumulative translation adjustments

        (40,467     (29,257

Deferred income taxes

        14,136       264  
     

 

 

   

 

 

 

Total

        (26,331     (28,993

Defined benefit pension plans:

       

Pension liability adjustment

        743       (25

Deferred income taxes

        (318     (188
     

 

 

   

 

 

 

Total

        425       (213

Non-trading securities:

       

Net unrealized gain on non-trading securities

        678       —    

Deferred income taxes

        (360     —    
     

 

 

   

 

 

 

Total

        318       —    
     

 

 

   

 

 

 

Own credit adjustments:

       

Own credit adjustments:

        3,473                26,630  

Deferred income taxes

        (310     (4,602
     

 

 

   

 

 

 

Total

        3,163       22,028  
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        (22,425     (7,178
     

 

 

   

 

 

 

Comprehensive income (loss)

      ¥ 67,368     ¥ (103,040

Less: Comprehensive income (loss) attributable to noncontrolling interests

        2,885       (1,041
     

 

 

   

 

 

 

Comprehensive income (loss) attributable to NHI shareholders

      ¥ 64,483     ¥ (101,999
     

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

26


Table of Contents

(4) Consolidated Statements of Changes in Equity (UNAUDITED)

 

            Millions of yen  
            Nine months ended December 31  
            2017     2018  

Common stock

                        

Balance at beginning of year

      ¥ 594,493     ¥ 594,493  
     

 

 

   

 

 

 

Balance at end of period

        594,493       594,493  
     

 

 

   

 

 

 

Additional paid-in capital

       

Balance at beginning of year

        681,329       675,280  

Stock-based compensation awards

        (6,201     8,245  
     

 

 

   

 

 

 

Balance at end of period

        675,128       683,525  
     

 

 

   

 

 

 

Retained earnings

       

Balance at beginning of year

        1,663,234       1,696,890  

Cumulative effect of change in accounting principle(1)

        —         1,564  

Net income (loss) attributable to NHI shareholders

        196,668       (101,286

Cash dividends(2)

        (31,375     (10,173

Gain (loss) on sales of treasury stock

        (4,097     (994

Cancellation of treasury stock

        (111,941     (89,916
     

 

 

   

 

 

 

Balance at end of period

        1,712,489       1,496,085  
     

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

       

Cumulative translation adjustments

       

Balance at beginning of year

        47,767       (15,596

Net change during the period

        (17,340     32,594  
     

 

 

   

 

 

 

Balance at end of period

        30,427       16,998  
     

 

 

   

 

 

 

Defined benefit pension plans

       

Balance at beginning of year

        (41,020     (47,837

Pension liability adjustment

        788       1,044  
     

 

 

   

 

 

 

Balance at end of period

        (40,232     (46,793
     

 

 

   

 

 

 

Non-trading securities

       

Balance at beginning of year

        20,344       —    

Net unrealized gain (loss) on non-trading securities

        1,182       —    
     

 

 

   

 

 

 

Balance at end of period

        21,526       —    
     

 

 

   

 

 

 

Own credit adjustments

       

Balance at beginning of year

        6,561       4,077  

Own credit adjustments

        (6,176     25,368  
     

 

 

   

 

 

 

Balance at end of period

        385                29,445  
     

 

 

   

 

 

 

Balance at end of period

                 12,106       (350
     

 

 

   

 

 

 

Common stock held in treasury

       

Balance at beginning of year

        (182,792     (157,987

Repurchases of common stock

        (101,268     (51,711

Sales of common stock

        0       0  

Common stock issued to employees

        19,055       8,972  

Cancellation of common stock

        111,941       89,916  

Other net change in treasury stock

        563       —    
     

 

 

   

 

 

 

Balance at end of period

        (152,501     (110,810
     

 

 

   

 

 

 

Total NHI shareholders’ equity

       
     

 

 

   

 

 

 

Balance at end of period

        2,841,715       2,662,943  
     

 

 

   

 

 

 

Noncontrolling interests

       

Balance at beginning of year

        53,875       50,504  

Cash dividends

        (1,940     (2,457

Net income attributable to noncontrolling interests

        4,779       2,901  

Accumulated other comprehensive income attributable to noncontrolling interests

        1,288       744  

Purchase / sale of subsidiary shares, net

        191       415  

Other net change in noncontrolling interests

        5,773       (9,039
     

 

 

   

 

 

 

Balance at end of period

        63,966       43,068  
     

 

 

   

 

 

 

Total equity

       

Balance at end of period

      ¥   2,905,681     ¥   2,706,011  
     

 

 

   

 

 

 

 

(1)    Represents the adjustment to initially apply Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.”
(2)    Dividends per share    Nine months ended December 31, 2017 ¥ 9.00    Three months ended December 31, 2017 ¥ 0.00
      Nine months ended December 31, 2018 ¥ 3.00    Three months ended December 31, 2018 ¥ 0.00

The accompanying notes are an integral part of these consolidated financial statements.

 

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(5) Consolidated Statements of Cash Flows (UNAUDITED)

 

            Millions of yen  
            Nine months ended December 31  
            2017     2018  

Cash flows from operating activities:

                        

Net income (loss)

      ¥ 201,447     ¥ (98,385

Adjustments to reconcile net income (loss) to net cash used in operating activities:

       

Depreciation and amortization

        56,194       43,356  

Impairment of goodwill

        —         81,372  

(Gain) loss on investments in equity securities

        (7,654     8,864  

Deferred income taxes

        21,072       7,265  

Changes in operating assets and liabilities:

       

Time deposits

        (2,759     (33,083

Deposits with stock exchanges and other segregated cash(2)

        (19,501     4,006  

Trading assets and private equity investments(1)

        (1,411,118     (2,254,436

Trading liabilities(1)

        603,132       (667,780

Securities purchased under agreements to resell, net of securities sold under agreements to repurchase

        (1,010,584     337,656  

Securities borrowed, net of securities loaned

        1,279,869       2,091,175  

Other secured borrowings

        143,810       15,315  

Loans and receivables, net of allowance for doubtful accounts(1)

        (591,681     106,354  

Payables(1)

        225,243       12,950  

Bonus accrual

        (42,095     (60,892

Accrued income taxes, net

        10,046       3,645  

Other, net

        3,424       (38,142
     

 

 

   

 

 

 

Net cash used in operating activities(2)

        (541,155     (440,760
     

 

 

   

 

 

 

Cash flows from investing activities:

       

Payments for purchases of office buildings, land, equipment and facilities

        (187,245     (193,569

Proceeds from sales of office buildings, land, equipment and facilities

        164,243       182,661  

Payments for purchases of investments in equity securities

        (61     —    

Proceeds from sales of investments in equity securities

        932       321  

Increase in loans receivable at banks, net

        (49,248     (21,167

Decrease in non-trading debt securities, net

                 52,887                29,983  

Other, net

        41,766       (1,101
     

 

 

   

 

 

 

Net cash provided by (used in) investing activities

        23,274       (2,872
     

 

 

   

 

 

 

Cash flows from financing activities:

       

Increase in long-term borrowings

        1,758,315       1,593,679  

Decrease in long-term borrowings

        (1,424,989     (1,200,563

Increase in short-term borrowings, net

        142,004       52,728  

Increase in deposits received at banks, net

        21,667       136,246  

Proceeds from sales of common stock held in treasury

        682       303  

Payments for repurchases of common stock held in treasury

        (101,268     (51,711

Payments for cash dividends

        (70,199     (47,475
     

 

 

   

 

 

 

Net cash provided by financing activities

        326,212       483,207  
     

 

 

   

 

 

 

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents(2)

        11,836       44,703  
     

 

 

   

 

 

 

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents(2)

        (179,833     84,278  

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year(2)

        2,537,066       2,354,868  
     

 

 

   

 

 

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period(2)

      ¥   2,357,233     ¥   2,439,146  
     

 

 

   

 

 

 

Supplemental information:

       

Cash paid during the period for—

       

Interest

      ¥ 344,913     ¥ 508,850  

Income tax payments, net

      ¥ 48,670     ¥ 25,422  

 

(1)

Due to changes in accounting policy which Nomura adopted on April 1, 2018, certain reclassifications of amounts previously reported amounts have been made to conform to the current year presentation. See Note 1. “Basis of Accounting” for further details.

(2)

In accordance with ASU 2016-18 “Restricted Cash” which Nomura adopted on April 1, 2018, certain reclassification of amounts previously reported as cash, cash equivalents, restricted cash and restricted cash equivalents for the nine months ended December 31, 2017 have been made to conform to the current year presentation.

 

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The following table presents a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as reported within the consolidated balance sheets to the total of the same such amounts shown in the statements of cash flows above. Restricted cash and restricted cash equivalents are amounts where access, withdrawal or usage by Nomura is substantively prohibited by a third party entity outside of the Nomura group.

 

     Millions of yen  
     Nine months ended December 31  
     2017     2018  

Cash and cash equivalents reported in Cash and cash equivalents

   ¥ 2,357,073     ¥ 2,438,649  

Restricted cash and restricted cash equivalents reported in Deposits with stock exchanges and other segregated cash

   ¥ 160     ¥ 497  
  

 

 

   

 

 

 

Total cash, cash equivalent, restricted cash and restricted cash equivalents

   ¥     2,357,233      ¥     2,439,146   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Notes to the Consolidated Financial Statements (UNAUDITED)

1. Basis of accounting:

In December 2001, Nomura Holdings, Inc. (“the Company”) filed a registration statement, in accordance with the Securities Exchange Act of 1934, with the United States Securities and Exchange Commission (“SEC”) in order to list its American Depositary Shares (“ADS”) on the New York Stock Exchange. Since then, the Company has had an obligation to file an annual report on Form 20-F with the SEC in accordance with the Securities Exchange Act of 1934.

Therefore, the Company and other entities in which it has a controlling financial interest (collectively “Nomura”) prepares consolidated financial statements in accordance with the accounting principles, procedures and presentations which are required in order to issue ADS, i.e., U.S. generally accepted accounting principles (“U.S. GAAP”), pursuant to Article 95 of “Regulations Concerning the Terminology, Forms and Preparation Methods of Quarterly Consolidated Financial Statements” (Cabinet Office Ordinance No. 64, 2007).

The following paragraphs describe the major differences between U.S. GAAP applied by Nomura and accounting principles generally accepted in Japan (“Japanese GAAP”) for the nine and three months ended December 31, 2018. Where the effect of these major differences are significant to Income before income taxes, Nomura discloses as (higher) or (lower) below the amount by which Income before income taxes based on U.S. GAAP was higher or lower than Japanese GAAP, respectively.

Scope of consolidation—

Under U.S. GAAP, the scope of consolidation is mainly determined by the ownership of a majority of the voting interests in an entity or by identifying the primary beneficiary of variable interest entities. Under Japanese GAAP, the scope of consolidation is determined by a “financial controlling model”, which takes into account the ownership level of voting interests in an entity and other factors.

Unrealized gains and losses on investments in equity securities—

Under U.S. GAAP applicable to broker-dealers, minority investments in equity securities are measured at fair value with changes in fair value recognized in earnings. Under Japanese GAAP, these investments are also measured at fair value, but unrealized gains and losses, net of applicable income taxes, are reported in other comprehensive income. Income before income taxes prepared under U.S. GAAP, therefore, was ¥6,893 million (higher) and ¥9,008 million (lower) for the nine months ended December 31, 2017 and 2018, respectively and ¥4,158 million (higher) and ¥9,944 million (lower) for the three months ended December 31, 2017 and 2018, respectively.

Unrealized gains and losses on non-trading debt and equity securities—

Under U.S. GAAP applicable to broker-dealers, non-trading securities are measured at fair value with changes in fair value recognized in earnings. Under Japanese GAAP, these securities are also measured at fair value, but unrealized gains and losses, net of applicable income taxes, are reported in other comprehensive income. Income before income taxes prepared under U.S. GAAP, therefore, was ¥30 million (lower) and ¥875 million (lower) for the nine months ended December 31, 2017 and 2018, respectively, and ¥381 million (lower) and ¥1,233 million (higher) for the three months ended December 31, 2017 and 2018, respectively for non-trading debt securities. Income before income taxes prepared under U.S. GAAP was ¥2,245 million (higher) and ¥3,085 million (lower) for the nine months ended December 31, 2017 and 2018, respectively, and ¥506 million (higher) and ¥2,498 million (lower) for the three months ended December 31, 2017 and 2018, respectively for non-trading equity securities.

Retirement and severance benefits—

Under U.S. GAAP, gains or losses resulting from either experience that is different from an actuarial assumption or a change in assumption is amortized over the average remaining service period of employees when a net gain or loss at the beginning of the year exceeds the “Corridor” which is defined as 10% of the larger of projected benefit obligation or the fair value of plan assets. Under Japanese GAAP, these gains or losses are amortized over a certain period regardless of the Corridor.

 

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Amortization of goodwill and equity method goodwill—

Under U.S. GAAP, goodwill is not amortized and is tested for impairment periodically. Under Japanese GAAP, goodwill is amortized over certain periods of less than 20 years using the straight-line method. Therefore, under U.S. GAAP, Income before income taxes was ¥5,232 million (higher) and ¥35,486 million (lower) for the nine months ended December 31, 2017 and 2018, respectively, and ¥1,751 million (higher) and ¥38,951 million (lower) for the three months ended December 31, 2017 and 2018, respectively.

Changes in the fair value of derivative contracts—

Under U.S. GAAP, all derivative contracts, including derivative contracts that have been designated as hedges of specific assets or specific liabilities, are carried at fair value, with changes in fair value recognized either in earnings or other comprehensive income. Under Japanese GAAP, derivative contracts that have been entered into for hedging purposes are carried at fair value with changes in fair value, net of applicable income taxes, recognized generally in other comprehensive income.

Fair value for financial assets and financial liabilities—

Under U.S. GAAP, the fair value option may be elected for eligible financial assets and financial liabilities which would otherwise be carried on a basis other than fair value (“the fair value option”). Where the fair value option is elected, the financial asset or financial liability is carried at fair value with changes in fair value are recognized in earnings. Under Japanese GAAP, the fair value option is not permitted. Therefore, under U.S. GAAP, Income before income taxes was ¥17,035 million (higher) and ¥30,881 million (lower) for the nine months ended December 31, 2017 and 2018, respectively and ¥5,121 million (higher) and ¥29,780 million (lower) for the three months ended December 31, 2017 and 2018, respectively. In addition, non-marketable equity securities which are carried at fair value under U.S. GAAP applicable to broker-dealers are carried at cost less impairment loss under Japanese GAAP.

Offsetting of amounts related to certain contracts—

Under U.S. GAAP, an entity that is party to a master netting arrangement is permitted to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement. Under Japanese GAAP, offsetting of such amounts is not permitted.

Stock issuance costs—

Under U.S. GAAP, stock issuance costs are deducted from capital. Under Japanese GAAP, stock issuance costs are either immediately expensed or capitalized as a deferred asset and amortized over periods of up to three years using the straight-line method.

Accounting for change in controlling interest in a consolidated subsidiary’s shares—

Under U.S. GAAP, when a parent’s ownership interest decreases as a result of sales of a subsidiary’s common shares by the parent, and the subsidiary becomes an equity method investee, the parent’s remaining investment in the former subsidiary is measured at fair value as of the date of loss of a controlling interest and a related valuation gain or loss is recognized in earnings. Under Japanese GAAP, the remaining investment on the parent’s consolidated balance sheet is computed as the sum of the carrying amount of investment in the equity method investee recorded in the parent’s stand-alone balance sheet as adjusted for the share of net income or losses and other adjustments from initial acquisition through to the date of loss of a controlling interest multiplied by the ratio of the remaining shareholding percentage against the holding percentage prior to loss of control.

 

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New accounting pronouncements recently adopted—

The following table presents a summary of new accounting pronouncements relevant to Nomura which have been adopted during the three months ended December 31, 2018.

 

Pronouncement

  

Summary of new guidance

  

Expected adoption
date and method
of adoption

  

Effect on these
consolidated

statements

ASU 2018-13,

Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

  

• Removes certain disclosure requirements from ASC 820, including transfers between Level 1 and Level 2 and valuation processes for Level 3 financial instruments.

 

• Clarifies the disclosure requirement for the timing of redemption of investment in NAV and the uncertainty measurement.

 

• Introduces new disclosure requirements, including the changes in unrealized gains and losses for the reporting period included in other comprehensive income (“OCI”) for recurring Level 3 financial instruments held at the reporting date.

  

Nomura early adopted the removed and clarified disclosure requirements from October 1, 2018.

 

Nomura plans to adopt the new disclosure requirements from April 1, 2020.

   No material impacts on consolidated statements but certain disclosures about fair value measurement are removed or amended.

No new accounting pronouncements relevant to Nomura were adopted during the three months ended September 30, 2018.

The following table presents a summary of new accounting pronouncements relevant to Nomura which have been adopted during the three months ended June 30, 2018:

 

Pronouncement

  

Summary of new guidance

  

Actual adoption
date and method
of adoption

  

Effect on these
consolidated
statements

ASU 2014-09,

Revenue from Contracts with Customers(1)

  

• Replaces existing revenue recognition guidance in ASC 605 “Revenue Recognition” and certain industry-specific revenue recognition guidance with a new prescriptive model for recognition of revenue for services provided to customers.

 

• Introduces specific guidance for the treatment of variable consideration, non-cash consideration, significant financing arrangements and amounts payable to the customer.

 

• Revises existing guidance for principal-versus-agency determination.

 

• Requires revenue recognition and measurement principles to be applied to sales of nonfinancial and in substance nonfinancial assets to noncustomers.

 

• Specifies the accounting for costs to obtain or fulfill a customer contract.

 

• Requires extensive new footnote disclosures around nature and type of revenue from services provided to customers.

   Modified retrospective adoption from April 1, 2018.   

¥1,564 million adjustment to Retained earnings, ¥517 million adjustment to Payables to other than customers,

¥1,750 million adjustment to Other long-term assets, and ¥703 million to Deferred tax assets due to change in timing of recognition of revenues from sales of certain investment funds upon adoption on April 1, 2018. Other transitional changes were not significant.(2)

 

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Pronouncement

  

Summary of new guidance

  

Actual adoption
date and method
of adoption

  

Effect on these
consolidated
statements

ASU 2016-15,

Classification of Certain Cash Receipts and Cash Payments” and ASU 2016-18,Restricted Cash

  

• Amends the classification of certain cash receipts and cash payments in the statement of cash flows.

 

• Requires movements in restricted cash and restricted cash equivalents to be presented as part of cash and cash equivalents in the statement of cash flows.

 

• Requires new disclosures on the nature and amount of restricted cash and restricted cash equivalents.

   Full retrospective adoption from April 1, 2018.    ¥497 million of restricted cash and restricted cash equivalents are now presented with cash and cash equivalents in the statements of cash flows during the nine month ended December 31, 2018 and similar reclassifications have been made in comparative periods presented. See the reconciliation table provided with the statements of cash flows for further details.

ASU 2017-07,

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

  

• Clarifies the service cost component of net periodic pension cost to be reported in the same income statement line item as compensation costs arising from other services.

 

•   Clarifies only the service cost component is eligible for capitalization as an asset when applicable.

   Full retrospective adoption from April 1, 2018.    ¥803 million reclassification from Compensation and benefits to Other expenses. Impacts on comparative periods presented were immaterial.

 

(1)

As subsequently amended by ASU 2015-14 “Revenue from Contracts with Customers—Deferral of the Effective Date”, ASU 2016 -08 “Revenue from Contracts with Customers—Principal versus Agent Considerations”, ASU 2016-10 “Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing” and certain other Accounting Standard Updates.

(2)

See Note 4 “Revenue from services provided to customers” for new disclosures of revenues from services have been made and for further details of the impact of adoption of the new guidance.

In addition, Nomura changed its accounting policy for derivative transactions as follows.

Nomura collects and remits cash margin between institutional investors and central clearing houses in its execution and clearing services of exchange-traded derivative transactions. Cash margin remitted to central clearing houses was reflected on Nomura’s consolidated balance sheets. However, with effect from April 1, 2018, revisiting nature of the transactions, Nomura has revised its accounting policy for when such balances are recognized on Nomura’s consolidated group balance sheet and as a result, certain cash margin amounts as well as an equivalent amount reflecting the obligation to return such amounts to clients are no longer recognized on the balance sheet if certain criteria are met. Nomura has restated previously reported amounts of Receivables from other than customers decreased by ¥237.0 billion and Payables to other than customers decreased by ¥237.0 billion, respectively, to conform to the current presentation.

Daily variation margin for certain derivative transactions traded in Japan was reflected on Nomura’s consolidated balance sheets. However, from April 1, 2018, Nomura changed its accounting policy as a result of amendment of the rules of a specific central clearing house and daily variation margin and related derivative assets and liabilities are no longer recognized on the balance sheet. Nomura has restated previously reported amounts of Trading assets decreased by ¥4.9 billion, Receivables from other than customers decreased by ¥5.5 billion and Trading liabilities decreased by ¥10.4 billion respectively to conform to the current presentation.

 

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Table of Contents

Future accounting developments—

The following table presents a summary of new authoritative accounting pronouncements relevant to Nomura which will be adopted on or after April 1, 2019 and which may have a material impact on these financial statements:

 

Pronouncement

  

Summary of new guidance

  

Expected adoption
date and method
of adoption

  

Effect on these
consolidated
statements

ASU 2016-02,

Leases”(1)

  

• Replaces ASC 840 “Leases”, the current guidance on lease accounting, and revised the definition of a lease.

 

• Requires all lessees to recognize a right of use asset and corresponding lease liability on balance sheet.

 

• Lessor accounting is largely unchanged from current guidance.

 

• Simplifies the accounting for sale leaseback and “build-to-suit” leases.

 

• Requires extensive new qualitative and quantitative footnote disclosures on lease arrangements.

   Modified retrospective adoption from April 1, 2019.(2)(3)    Currently evaluating the potential impact however a gross up of Nomura’s balance sheet is expected on adoption date and in subsequent reporting periods.

ASU 2016-13,

Measurement of Credit Losses on Financial Instruments”

  

• Introduces a new model for recognition and measurement of credit losses against certain financial instruments such as loans, debt securities and receivables which are not carried at fair value with changes in fair value recognized through earnings. The model also applies to off balance sheet credit exposures such as written loan commitments, standby letters of credit and issued financial guarantees not accounted for as insurance, which are not carried at fair value through earnings.

 

• The new model based on lifetime current expected credit losses (CECL) measurement, to be recognized at the time an in-scope instrument is originated, acquired or issued.

 

• Replaces existing incurred credit losses model under current GAAP.

 

• Requires enhanced qualitative and quantitative disclosures around credit risk, the methodology used to estimate and monitor expected credit losses and changes in estimates of expected credit losses.

   Modified retrospective adoption from April 1, 2020.(3)    Currently evaluating the potential impact but an overall increase in allowances for credit losses are expected to be recognized which will impact earnings in subsequent reporting periods.

 

(1)

As subsequently amended by ASU 2018-01 “Land Easement Practical Expedient for Transition to Topic 842”, ASU 2018-10Codification Improvements to Topic 842, Leases”, ASU 2018-11Leases (Topic 842): Targeted Improvements”, and ASU 2018-20Leases (Topic 842): Narrow-Scope Improvements for Lessors.

(2)

Nomura plans to use certain practical expedients permitted by ASC 842 including adopting the new requirements through a cumulative-effect adjustment to retained earnings on adoption date.

(3)

Unless Nomura early adopts which is considered unlikely as of the date of these consolidated financial statements.

 

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2. Fair value measurements:

The fair value of financial instruments

A significant amount of Nomura’s financial instruments are measured at fair value. Financial assets measured at fair value on a recurring basis are reported in the consolidated balance sheets within Trading assets and private equity investments, Loans and receivables, Collateralized agreements and Other assets. Financial liabilities measured at fair value on a recurring basis are reported within Trading liabilities, Short-term borrowings, Payables and deposits, Collateralized financing, Long-term borrowings and Other liabilities.

Other financial assets and financial liabilities are measured at fair value on a nonrecurring basis, where the primary measurement basis is not fair value but where fair value is used in specific circumstances after initial recognition, such as to measure impairment.

In all cases, fair value is determined in accordance with ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value as the amount that would be exchanged to sell a financial asset or transfer a financial liability in an orderly transaction between market participants at the measurement date. It assumes that the transaction occurs in the principal market for the relevant financial assets or financial liabilities, or in the absence of a principal market, the most advantageous market.

Fair value is usually determined on an individual financial instrument basis consistent with the unit of account of the financial instrument. However, certain financial instruments managed on a portfolio basis are valued as a portfolio, namely based on the price that would be received to sell a net long position (i.e., a net financial asset) or transfer a net short position (i.e., a net financial liability) consistent with how market participants would price the net risk exposure at the measurement date.

Financial assets measured at fair value also include investments in certain funds where, as a practical expedient, fair value is determined on the basis of net asset value per share (“NAV per share”) if the NAV per share is calculated in accordance with certain industry standard principles.

Increases and decreases in the fair value of assets and liabilities will significantly impact Nomura’s position, performance, liquidity and capital resources. As explained below, valuation techniques applied contain inherent uncertainties and Nomura is unable to predict the accurate impact of future developments in the market. Where appropriate, Nomura uses economic hedging strategies to mitigate its risk, although these hedges are also subject to unpredictable movements in the market.

Valuation methodology for financial instruments carried at fair value on a recurring basis

The fair value of financial instruments is based on quoted market prices including market indices, broker or dealer quotations or an estimation by management of the expected exit price under current market conditions. Various financial instruments, including cash instruments and over-the-counter (“OTC”) contracts, have bid and offer prices that are observable in the market. These are measured at the point within the bid-offer range which best represents Nomura’s estimate of fair value. Where quoted market prices or broker or dealer quotations are not available, prices for similar instruments or valuation pricing models are considered in the determination of fair value.

Where quoted prices are available in active markets, no valuation adjustments are taken to modify the fair value of assets or liabilities marked using such prices. Other instruments may be measured using valuation techniques, such as valuation pricing models incorporating observable valuation inputs, unobservable parameters or a combination of both. Valuation pricing models use valuation inputs which would be considered by market participants in valuing similar financial instruments.

Valuation pricing models and their underlying assumptions impact the amount and timing of unrealized and realized gains and losses recognized, and the use of different valuation pricing models or underlying assumptions could produce different financial results. Valuation uncertainty results from a variety of factors, including the valuation technique or model selected, the quantitative assumptions used within the valuation model, the inputs into the model, as well as other factors. Valuation adjustments are used to reflect the assessment of this uncertainty. Common valuation adjustments include model reserves, credit adjustments, close-out adjustments, and other appropriate instrument-specific adjustments, such as those to reflect transfer or sale restrictions.

 

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The level of adjustments is largely judgmental and is based on an assessment of the factors that management believe other market participants would use in determining the fair value of similar financial instruments. The type of adjustments taken, the methodology for the calculation of these adjustments, and the valuation inputs for these calculations are reassessed periodically to reflect current market practice and the availability of new information.

For example, the fair value of certain financial instruments includes adjustments for credit risk; both with regards to counterparty credit risk on positions held and Nomura’s own creditworthiness on positions issued. Credit risk on financial assets is significantly mitigated by credit enhancements such as collateral and netting arrangements. Any net credit exposure is measured using available and applicable valuation inputs for the relevant counterparty. The same approach is used to measure the credit exposure on Nomura’s financial liabilities as is used to measure counterparty credit risk on Nomura’s financial assets.

Such valuation pricing models are calibrated to the market on a regular basis and inputs used are adjusted for current market conditions and risks. The Global Model Validation Group (“MVG”) within Nomura’s Risk Management Department reviews pricing models and assesses model appropriateness and consistency independently of the front office. The model reviews consider a number of factors about a model’s suitability for valuation and sensitivity of a particular product. Valuation models are calibrated to the market on a periodic basis by comparison to observable market pricing, comparison with alternative models and analysis of risk profiles.

As explained above, any changes in fixed income, equity, foreign exchange and commodity markets can impact Nomura’s estimates of fair value in the future, potentially affecting trading gains and losses. Where financial contracts have longer maturity dates, Nomura’s estimates of fair value may involve greater subjectivity due to the lack of transparent market data.

Fair value hierarchy

All financial instruments measured at fair value, including those measured at fair value using the fair value option, have been categorized into a three-level hierarchy (“fair value hierarchy”) based on the transparency of valuation inputs used by Nomura to estimate fair value. A financial instrument is classified in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement of the financial instrument. The three levels of the fair value hierarchy are defined as follows, with Level 1 representing the most transparent inputs and Level 3 representing the least transparent inputs:

Level 1:

Observable valuation inputs that reflect quoted prices (unadjusted) for identical financial instruments traded in active markets at the measurement date.

Level 2:

Valuation inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the financial instrument.

Level 3:

Unobservable valuation inputs which reflect Nomura assumptions and specific data.

The availability of valuation inputs observable in the market varies by product and can be affected by a variety of factors. Significant factors include, but are not restricted to the prevalence of similar products in the market, especially for customized products, how established the product is in the market, for example, whether it is a new product or is relatively mature, and the reliability of information provided in the market which would depend, for example, on the frequency and volume of current data. A period of significant change in the market may reduce the availability of observable data. Under such circumstances, financial instruments may be reclassified into a lower level in the fair value hierarchy.

Significant judgments used in determining the classification of financial instruments include the nature of the market in which the product would be traded, the underlying risks, the type and liquidity of market data inputs and the nature of observed transactions for similar instruments.

Where valuation models include the use of valuation inputs which are less observable or unobservable in the market, significant management judgment is used in establishing fair value. The valuations for Level 3 financial instruments, therefore, involve a greater degree of judgment than those valuations for Level 1 or Level 2 financial instruments.

Certain criteria management use to determine whether a market is active or inactive include the number of transactions, the frequency that pricing is updated by other market participants, the variability of price quotes among market participants, and the amount of publicly available information.

 

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The following tables present the amounts of Nomura’s financial instruments measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2018 within the fair value hierarchy.

 

     Billions of yen  
     March 31, 2018  
     Level 1      Level 2      Level 3     Counterparty
and Cash
Collateral
Netting(1)
    Balance as of
March 31, 2018
 

Assets:

            

Trading assets and private equity investments(2)

            

Equities(3)

   ¥ 1,741      ¥ 907      ¥ 21     ¥ —       ¥ 2,669  

Private equity investments(3)

     —          3        3       —         6  

Japanese government securities

     2,205        —          —         —         2,205  

Japanese agency and municipal securities

     —          188        1       —         189  

Foreign government, agency and municipal securities

     2,980        1,234        6       —         4,220  

Bank and corporate debt securities and loans for trading purposes

     —          1,186        139       —         1,325  

Commercial mortgage-backed securities (“CMBS”)

     —          2        2       —         4  

Residential mortgage-backed securities (“RMBS”)

     —          2,803        0       —         2,803  

Real estate-backed securities

     —          —          63       —         63  

Collateralized debt obligations (“CDOs”) and other(4)

     —          62        24       —         86  

Investment trust funds and other

     271        67        1       —         339  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total trading assets and private equity investments

     7,197        6,452        260       —         13,909  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Derivative assets(5)(13)

            

Equity contracts

     2        973        36       —         1,011  

Interest rate contracts

     16        8,009        71       —         8,096  

Credit contracts

     0        498        17       —         515  

Foreign exchange contracts

     0        5,447        48       —         5,495  

Commodity contracts

     1        0        —         —         1  

Netting

     —          —          —         (14,094     (14,094
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative assets

     19        14,927        172       (14,094     1,024  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   ¥ 7,216      ¥ 21,379      ¥ 432     ¥ (14,094   ¥ 14,933  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Loans and receivables(6)

     —          484        70       —         554  

Collateralized agreements(7)

     —          1,181        5       —         1,186  

Other assets

            

Non-trading debt securities

     133        353        —         —         486  

Other(2)(3)

     463        15        169       —         647  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 7,812      ¥ 23,412      ¥ 676     ¥ (14,094   ¥ 17,806  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities:

            

Trading liabilities

            

Equities

   ¥ 1,146      ¥ 191      ¥ 1     ¥ —       ¥ 1,338  

Japanese government securities

     2,263        —          —         —         2,263  

Japanese agency and municipal securities

     —          1        —         —         1  

Foreign government, agency and municipal securities

     2,786        590        —         —         3,376  

Bank and corporate debt securities

     —          391        0       —         391  

Residential mortgage-backed securities (“RMBS”)

     —          1        —         —         1  

Collateralized debt obligations (“CDOs”) and other(4)

     —          3        0       —         3  

Investment trust funds and other

     71        25        0       —         96  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total trading liabilities

     6,266        1,202        1       —         7,469  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Derivative liabilities(5)(13)

            

Equity contracts

     1        1,080        37       —         1,118  

Interest rate contracts

     9        7,427        124       —         7,560  

Credit contracts

     0        410        15       —         425  

Foreign exchange contracts

     0        5,066        21       —         5,087  

Commodity contracts

     1        0        —         —         1  

Netting

     —          —          —         (13,457     (13,457
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative liabilities

     11        13,983        197       (13,457     734  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   ¥ 6,277      ¥ 15,185      ¥ 198     ¥ (13,457   ¥ 8,203  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Short-term borrowings(8)

     —          355        17       —         372  

Payables and deposits(9)

     —          0        (1     —         (1

Collateralized financing(7)

     —          566        3       —         569  

Long-term borrowings(8)(10)(11)

     18        2,403        429       —         2,850  

Other liabilities(12)

     293        33        1       —         327  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 6,588      ¥ 18,542      ¥ 647     ¥ (13,457   ¥                 12,320  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Billions of yen  
     December 31, 2018  
     Level 1      Level 2      Level 3     Counterparty
and Cash
Collateral
Netting(1)
    Balance as of
December 31, 2018
 

Assets:

            

Trading assets and private equity investments(2)

            

Equities(3)

   ¥ 1,273      ¥ 998      ¥ 16     ¥ —       ¥ 2,287  

Private equity investments(3)

     —          2        9       —         11  

Japanese government securities

     2,494        —          —         —         2,494  

Japanese agency and municipal securities

     —          244        1       —         245  

Foreign government, agency and municipal securities

     4,815        1,408        7       —         6,230  

Bank and corporate debt securities and loans for trading purposes

     —          1,070        163       —         1,233  

Commercial mortgage-backed securities (“CMBS”)

     —          2        1       —         3  

Residential mortgage-backed securities (“RMBS”)

     —          3,436        2       —         3,438  

Real estate-backed securities

     —          7        103       —         110  

Collateralized debt obligations (“CDOs”) and other(4)

     —          48        27       —         75  

Investment trust funds and other

     430        56        1       —         487  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total trading assets and private equity investments

     9,012        7,271        330       —         16,613  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Derivative assets(5)

            

Equity contracts

     0        861        50       —         911  

Interest rate contracts

     9        7,812        11       —         7,832  

Credit contracts

     1        352        38       —         391  

Foreign exchange contracts

     1        5,450        45       —         5,496  

Commodity contracts

     0        0        —         —         0  

Netting

     —          —          —         (13,741     (13,741
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative assets

     11        14,475        144       (13,741     889  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   ¥ 9,023      ¥ 21,746      ¥ 474     ¥ (13,741   ¥ 17,502  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Loans and receivables(6)

     —          537        114       —         651  

Collateralized agreements(7)

     —          561        10       —         571  

Other assets

            

Non-trading debt securities

     139        319        —         —         458  

Other(2)(3)

     333        7        159       —         499  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 9,495      ¥ 23,170      ¥ 757     ¥ (13,741   ¥ 19,681  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities:

            

Trading liabilities

            

Equities

   ¥ 1,272      ¥ 203      ¥ 0     ¥ —       ¥ 1,475  

Japanese government securities

     1,347        —          —         —         1,347  

Japanese agency and municipal securities

     —          3        —         —         3  

Foreign government, agency and municipal securities

     2,605        973        —         —         3,578  

Bank and corporate debt securities

     —          337        0       —         337  

Residential mortgage-backed securities (“RMBS”)

     —          0        —         —         0  

Collateralized debt obligations (“CDOs”) and other(4)

     —          0        0       —         0  

Investment trust funds and other

     126        49        0       —         175  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total trading liabilities

     5,350        1,565        0       —         6,915  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Derivative liabilities(5)

            

Equity contracts

     0        973        40       —         1,013  

Interest rate contracts

     5        7,318        66       —         7,389  

Credit contracts

     1        341        48       —         390  

Foreign exchange contracts

     —          5,275        19       —         5,294  

Commodity contracts

     2        0        0       —         2  

Netting

     —          —          —         (13,311     (13,311
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total derivative liabilities

     8        13,907        173       (13,311     777  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

   ¥ 5,358      ¥ 15,472      ¥ 173     ¥ (13,311   ¥ 7,692  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Short-term borrowings(8)

     —          260        43       —         303  

Payables and deposits(9)

     —          0        0        —         0  

Collateralized financing(7)

     —          288        3       —         291  

Long-term borrowings(8)(10)(11)

     31        2,707        461       —         3,199  

Other liabilities(12)

     195        18        0       —         213  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   ¥ 5,584      ¥ 18,745      ¥ 680     ¥ (13,311   ¥                 11,698  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

 

(1)

Represents the amount offset under counterparty netting of derivative assets and liabilities as well as cash collateral netting against net derivatives.

(2)

Certain investments that are measured at fair value using net asset value per share as a practical expedient have not been classified in the fair value hierarchy. As of March 31, 2018 and December 31, 2018, the fair values of these investments which are included in Trading assets and private equity investments were ¥47 billion and ¥35 billion, respectively. As of March 31, 2018 and December 31, 2018, the fair values of these investments which are included in Other assets—Others were ¥2 billion and ¥1 billion, respectively.

(3)

Includes equity investments that would have been accounted for under the equity method had Nomura not chosen to elect the fair value option.

(4)

Includes collateralized loan obligations (“CLOs”) and asset-backed securities (“ABS”) such as those secured on credit card loans, auto loans and student loans.

(5)

Each derivative classification includes derivatives with multiple risk underlyings. For example, interest rate contracts include complex derivatives referencing interest rate risk as well as foreign exchange risk or other factors such as prepayment rates. Credit contracts include credit default swaps as well as derivatives referencing corporate and government debt securities.

(6)

Includes loans for which the fair value option has been elected.

(7)

Includes collateralized agreements or collateralized financing for which the fair value option has been elected.

(8)

Includes structured notes for which the fair value option has been elected.

(9)

Includes embedded derivatives bifurcated from deposits received at banks. If unrealized gains are greater than unrealized losses, deposits are reduced by the excess amount.

(10)

Includes embedded derivatives bifurcated from issued structured notes. If unrealized gains are greater than unrealized losses, borrowings are reduced by the excess amount.

(11)

Includes liabilities recognized from secured financing transactions that are accounted for as financings rather than sales. Nomura elected the fair value option for these liabilities.

(12)

Includes loan commitments for which the fair value option has been elected.

(13)

Due to the changes in our accounting policy which Nomura adopted on April 1, 2018, certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Please refer to Note 1. “Basis of accounting” for further details.

 

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Table of Contents

Valuation techniques by major class of financial instrument

The valuation techniques used by Nomura to estimate fair value for major classes of financial instruments, together with the significant inputs which determine classification in the fair value hierarchy, are as follows.

Equities and equity securities reported within Other assets—Equities and equity securities reported within Other assets include direct holdings of both listed and unlisted equity securities, and fund investments. The fair value of listed equity securities is determined using quoted prices for identical securities from active markets where available. These valuations should be in line with market practice and therefore can be based on bid prices or mid-market prices. Nomura determines whether the market is active depending on the sufficiency and frequency of trading activity. Where these securities are classified in Level 1 of the fair value hierarchy, no valuation adjustments are made to fair value. Listed equity securities traded in inactive markets are also generally valued using the exchange price and are classified in Level 2. Whilst rare in practice, Nomura may apply a discount or liquidity adjustment to the exchange price of a listed equity security traded in an inactive market if the exchange price is not considered to be an appropriate representation of fair value. These adjustments are determined by individual security and are not determined or influenced by the size of holding. The amount of such adjustments made to listed equity securities traded in inactive markets was ¥nil as of March 31, 2018 and December 31, 2018, respectively. The fair value of unlisted equity securities is determined using the same methodology as private equity investments described below and are usually classified in Level 3 because significant valuation inputs such as liquidity discounts and credit spreads are unobservable. As a practical expedient, fund investments which do not have a readily determinable fair value are generally valued using NAV per share where available. Publicly traded mutual funds which are valued using a daily NAV per share are classified in Level 1. Fund investments where Nomura has the ability to redeem its investment with the investee at NAV per share as of the balance sheet date or within the near term are classified in Level 2. Fund investments where Nomura does not have the ability to redeem in the near term or does not know when it can redeem are classified in Level 3.

Private equity investments—The determination of fair value of unlisted private equity investments requires significant management judgment because the investments, by their nature, have little or no price transparency. Private equity investments are initially carried at cost as an approximation of fair value. Adjustments to carrying value are made if there is third-party evidence of a change in value. Adjustments are also made, in the absence of third-party transactions, if it is determined that the expected exit price of the investment is different from carrying value. In reaching that determination, Nomura primarily uses either a discounted cash flow (“DCF”) or market multiple valuation technique. A DCF valuation technique incorporates estimated future cash flows to be generated from the underlying investee, as adjusted for an appropriate growth rate discounted at a weighted average cost of capital (“WACC”). Market multiple valuation techniques include comparables such as Enterprise Value/earnings before interest, taxes, depreciation and amortization (“EV/EBITDA”) ratios, Price/Earnings (“PE”) ratios, Price/Book ratios, Price/Embedded Value ratios and other multiples based on relationships between numbers reported in the financial statements of the investee and the price of comparable companies. A liquidity discount may also be applied to either a DCF or market multiple valuation to reflect the specific characteristics of the investee. The liquidity discount includes considerations for various uncertainties in the model and inputs to valuation. Where possible these valuations are compared with the operating cash flows and financial performance of the investee or properties relative to budgets or projections, price/earnings data for similar quoted companies, trends within sectors and/or regions and any specific rights or terms associated with the investment, such as conversion features and liquidation preferences. Private equity investments are generally classified in Level 3 since the valuation inputs such as those mentioned above are usually unobservable.

Government, agency and municipal securities—The fair value of Japanese and other G7 government securities is primarily determined using quoted market prices, executable broker or dealer quotations, or alternative pricing sources. These securities are traded in active markets and therefore are classified within Level 1 of the fair value hierarchy. Non-G7 government securities, agency securities and municipal securities are valued using similar pricing sources but are generally classified in Level 2 as they are traded in inactive markets. Certain non-G7 securities may be classified in Level 1 because they are traded in active markets. Certain securities may be classified in Level 3 because they are traded infrequently and there is not sufficient information from comparable securities to classify them in Level 2. These are valued using DCF valuation techniques which include significant unobservable inputs such as credit spreads of the issuer.

Bank and corporate debt securities—The fair value of bank and corporate debt securities is primarily determined using DCF valuation techniques but also using broker or dealer quotations and recent market transactions of identical or similar debt securities, if available. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. The significant valuation inputs used for DCF valuations are yield curves, asset swap spreads, recovery rates and credit spreads of the issuer. Bank and corporate debt securities are generally classified in Level 2 of the fair value hierarchy because these valuation inputs are usually observable or market-corroborated. Certain bank and corporate debt securities will be classified in Level 3 because they are traded infrequently and there is insufficient information from comparable securities to classify them in Level 2, or credit spreads or recovery rates of the issuer used in DCF valuations are unobservable.

Commercial mortgage-backed securities (“CMBS”) and Residential mortgage-backed securities (“RMBS”)—The fair value of CMBS and RMBS is primarily determined using DCF valuation techniques but also using broker or dealer quotations and recent market transactions of identical or similar securities, if available. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. The significant valuation inputs include yields, prepayment rates, default probabilities and loss severities. CMBS and RMBS securities are generally classified in Level 2 because these valuation inputs are observable or market-corroborated. Certain CMBS and RMBS positions will be classified in Level 3 because they are traded infrequently and there is insufficient information from comparable securities to classify them in Level 2, or one or more of the significant valuation inputs used in DCF valuations are unobservable.

 

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Table of Contents

Real estate-backed securities—The fair value of real estate-backed securities is determined using broker or dealer quotations, recent market transactions or by reference to a comparable market index. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. Where all significant inputs are observable, the securities will be classified in Level 2. For certain securities, no direct pricing sources or comparable securities or indices may be available. These securities are valued using DCF or valuation techniques and are classified in Level 3 as the valuation includes significant unobservable valuation inputs such as yields or loss severities.

Collateralized debt obligations (“CDOs”) and other—The fair value of CDOs is primarily determined using DCF valuation techniques but also using broker or dealer quotations and recent market transactions of identical or similar securities, if available. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. The significant valuation inputs used include market spread data for each credit rating, yields, prepayment rates, default probabilities and loss severities. CDOs are generally classified in Level 2 of the fair value hierarchy because these valuation inputs are observable or market-corroborated. CDOs will be classified in Level 3 where one or more of the significant valuation inputs used in the DCF valuations are unobservable.

Investment trust funds and other—The fair value of investment trust funds is primarily determined using NAV per share. Publicly traded funds which are valued using a daily NAV per share are classified in Level 1 of the fair value hierarchy. For funds that are not publicly traded but Nomura has the ability to redeem its investment with the investee at NAV per share on the balance sheet date or within the near term, the investments are classified in Level 2. Investments where Nomura does not have the ability to redeem in the near term or does not know when it can redeem are classified in Level 3. The fair value of certain other investments reported within Investment trust funds and other is determined using DCF valuation techniques. These investments are classified in Level 3 as the valuation includes significant unobservable valuation inputs such as credit spreads of issuer and correlation.

Derivatives—Equity contracts—Nomura enters into both exchange-traded and OTC equity derivative transactions such as index and equity options, equity basket options and index and equity swaps. Where these derivatives are traded in active markets and the exchange price is representative of fair value, the fair value of exchange-traded equity derivatives is determined using an unadjusted exchange price and classified in Level 1 of the fair value hierarchy. The fair value of exchange-traded equity derivatives which are traded in inactive markets or where the exchange price is not representative of fair value is determined using a model price and are classified in Level 2. The fair value of OTC equity derivatives is determined through option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include equity prices, dividend yields, volatilities and correlations. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura‘s own creditworthiness on derivative liabilities. OTC equity derivatives are generally classified in Level 2 because all significant valuation inputs and adjustments are observable or market-corroborated. Certain less liquid vanilla or more complex equity derivatives are classified in Level 3 where dividend yield, volatility or correlation valuation inputs are significant and unobservable.

Derivatives—Interest rate contracts—Nomura enters into both exchange-traded and OTC interest rate derivative transactions such as interest rate swaps, currency swaps, interest rate options, forward rate agreements, swaptions, caps and floors. Where these derivatives are traded in active markets and the exchange price is representative of fair value, the fair value of exchange-traded interest rate derivatives is determined using an unadjusted exchange price and classified in Level 1 of the fair value hierarchy. The fair value of exchange-traded interest rate derivatives which are traded in inactive markets or where the exchange price is not representative of fair value is determined using a model price and are classified in Level 2. The fair value of OTC interest rate derivatives is determined through DCF valuation techniques as well as option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include interest rates, forward foreign exchange (“FX”) rates, volatilities and correlations. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura‘s own creditworthiness on derivative liabilities. OTC interest rate derivatives are generally classified in Level 2 because all significant valuation inputs and adjustments are observable or market-corroborated. Certain less liquid vanilla or more complex OTC interest rate derivatives are classified in Level 3 where interest rate, volatility or correlation valuation inputs are significant and unobservable.

Derivatives—Credit contracts—Nomura enters into OTC credit derivative transactions such as credit default swaps and credit options on single names, indices or baskets of assets. The fair value of OTC credit derivatives is determined through DCF valuation techniques as well as option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include interest rates, credit spreads, recovery rates, default probabilities, volatilities and correlations. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura’s own creditworthiness on derivative liabilities. OTC credit derivatives are generally classified in Level 2 of the fair value hierarchy because all significant valuation inputs and adjustments are observable or market-corroborated. Certain less liquid vanilla or more complex OTC credit derivatives are classified in Level 3 where credit spread, recovery rate, volatility or correlation valuation inputs are significant and unobservable.

 

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Derivatives—Foreign exchange contracts—Nomura enters into both exchange-traded and OTC foreign exchange derivative transactions such as foreign exchange forwards and currency options. The fair value of exchange-traded foreign exchange derivatives which are traded in inactive markets or where the exchange price is not representative of fair value is determined using a model price and are classified in Level 2. The fair value of OTC foreign exchange derivatives is determined through DCF valuation techniques as well as option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include interest rates, forward FX rates, spot FX rates and volatilities. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura’s own creditworthiness on derivative liabilities. OTC foreign exchange derivatives are generally classified in Level 2 because all significant valuation inputs and adjustments are observable or market-corroborated. Certain foreign exchange derivatives are classified in Level 3 where interest rates, volatility or correlation valuation inputs are significant and unobservable.

Nomura includes valuation adjustments in its estimation of fair value of certain OTC derivatives relating to funding costs associated with these transactions to be consistent with how market participants in the principal market for these derivatives would determine fair value.

Loans—The fair value of loans carried at fair value either as trading assets or through election of the fair value option is primarily determined using DCF valuation techniques as quoted prices are typically not available. The significant valuation inputs used are similar to those used in the valuation of corporate debt securities described above. Loans are generally classified in Level 2 of the fair value hierarchy because all significant valuation inputs are observable. Certain loans, however, are classified in Level 3 because they are traded infrequently and there is not sufficient information from comparable securities to classify them in Level 2 or credit spreads of the issuer used in DCF valuations are significant and unobservable.

Collateralized agreements and Collateralized financing—The primary types of collateralized agreement and financing transactions carried at fair value are reverse repurchase and repurchase agreements elected for the fair value option. The fair value of these financial instruments is primarily determined using DCF valuation techniques. The significant valuation inputs used include interest rates and collateral funding spreads such as general collateral or special rates. Reverse repurchase and repurchase agreements are generally classified in Level 2 of the fair value hierarchy because these valuation inputs are usually observable.

Non-trading debt securities—These are debt securities held by certain non-trading subsidiaries in the group and are valued and classified in the fair value hierarchy using the same valuation techniques used for other debt securities classified as Government, agency and municipal securities and Bank and corporate debt securities described above.

Short-term and long-term borrowings (“Structured notes”)—Structured notes are debt securities issued by Nomura or by consolidated variable interest entities (“VIEs”) which contain embedded features that alter the return to the investor from simply receiving a fixed or floating rate of interest to a return that depends upon some other variables, such as an equity or equity index, commodity price, foreign exchange rate, credit rating of a third party or a more complex interest rate (i.e., an embedded derivative).

The fair value of structured notes is determined using a quoted price in an active market for the identical liability if available, and where not available, using a mixture of valuation techniques that use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, similar liabilities when traded as assets, or an internal model which combines DCF valuation techniques and option pricing models, depending on the nature of the embedded features within the structured note. Where an internal model is used, Nomura estimates the fair value of both the underlying debt instrument and the embedded derivative components. The significant valuation inputs used to estimate the fair value of the debt instrument component include yield curves, prepayment rates default probabilities and loss severities. The significant valuation inputs used to estimate the fair value of the embedded derivative component are the same as those used for the relevant type of freestanding OTC derivative discussed above. A valuation adjustment is also made to the entire structured note in order to reflect Nomura’s own creditworthiness. This adjustment is determined based on recent observable secondary market transactions and executable broker quotes involving Nomura debt instruments and is therefore typically treated as a Level 2 valuation input. Structured notes are generally classified in Level 2 of the fair value hierarchy as all significant valuation inputs and adjustments are observable. Where any unobservable inputs are significant, such as yields, prepayment rates, default probabilities, loss severities, volatilities and correlations used to estimate the fair value of the embedded derivative component, structured notes are classified in Level 3.

Long-term borrowings (“Secured financing transactions”)—Secured financing transactions are liabilities recognized when a transfer of a financial asset does not meet the criteria for sales accounting under ASC 860 “Transfer and Servicing (“ASC 860”) and therefore the transaction is accounted for as a secured borrowing. These liabilities are valued using the same valuation techniques that are applied to the transferred financial assets which remain on the consolidated balance sheets and are therefore classified in the same level in the fair value hierarchy as the transferred financial assets. These liabilities do not provide general recourse to Nomura and therefore no adjustment is made to reflect Nomura’s own creditworthiness.

 

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Table of Contents

Level 3 financial instruments

The valuation of Level 3 financial assets and liabilities is dependent on certain significant valuation inputs which are unobservable. Common characteristics of an inactive market include a low number of transactions of the financial instrument, stale or non-current price quotes, price quotes that vary substantially either over time or among market makers, non-executable broker quotes or little publicly released information.

If corroborative evidence is not available to value Level 3 financial instruments, fair value may be measured using other equivalent products in the market. The level of correlation between the specific Level 3 financial instrument and the available benchmark instrument is considered as an unobservable valuation input. Other techniques for determining an appropriate value for unobservable input may consider information such as consensus pricing data among certain market participants, historical trends, extrapolation from observable market data and other information Nomura would expect market participants to use in valuing similar instruments.

Use of reasonably possible alternative valuation input assumptions to value Level 3 financial instruments will significantly influence fair value determination. Ultimately, the uncertainties described above about input assumptions imply that the fair value of Level 3 financial instruments is a judgmental estimate. The specific valuation for each instrument is based on management’s judgment of prevailing market conditions, in accordance with Nomura’s established valuation policies and procedures.

 

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Table of Contents

Quantitative and qualitative information regarding significant unobservable inputs

The following tables present quantitative and qualitative information about the significant unobservable valuation inputs used by Nomura to measure the fair value of financial instruments classified in Level 3 as of March 31, 2018 and December 31, 2018. These financial instruments will also typically include observable valuation inputs (i.e. Level 1 or Level 2 valuation inputs) which are not included in the table and are also often hedged using financial instruments which are classified in Level 1 or Level 2 of the fair value hierarchy. Changes in each of these significant unobservable valuation inputs used by Nomura will impact upon the fair value measurement of the financial instrument. The following tables also therefore qualitatively summarize how an increase in those significant unobservable valuation inputs to a different amount might result in a higher or lower fair value measurement at the reporting date and summarize the interrelationship between significant unobservable valuation inputs where more than one is used to measure fair value.

 

    March 31, 2018

Financial Instrument

  Fair
value in
billions
of yen
   

Valuation

technique

 

Significant

unobservable
valuation input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of
increases in
significant
unobservable
valuation

inputs(3)(4)

 

Interrelationships
between valuation

inputs(5)

Assets:

             

Trading assets and private equity investments

             

Equities

  ¥       21     DCF   Liquidity discounts   27.5 – 75.0%   68.3%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign government, agency and municipal securities

    6     DCF   Credit spreads   0.0 – 6.7%   0.8%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Bank and corporate debt securities and loans for trading purposes

    139     DCF   Credit spreads Recovery rates  

0.1 – 19.6%

0.0 – 98.0%

  4.1% 74.7%   Lower fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage- backed securities (“CMBS”)

    2     DCF   Yields   6.6 – 8.9%   7.7%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Real estate-backed securities

    63     DCF  

Yields

Loss severities

 

6.2 – 23.9%

0.0 – 70.8%

  16.3% 8.1%   Lower fair value Lower fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations (“CDOs”) and other

    24     DCF  

Yields

Prepayment rates

Default probabilities Loss severities

 

6.0 – 24.0%

20.0%

1.0 – 2.0%

40.0 – 100.0%

  13.1% 20.0% 2.0% 91.6%   Lower fair value Lower fair value Lower fair value Lower fair value  

Change in default probabilities typically accompanied by

directionally similar change in loss severities and opposite change in prepayment rates

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
    March 31, 2018

Financial Instrument

  Fair
value in
billions
of yen
   

Valuation

technique

 

Significant

unobservable
valuation input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of
increases in
significant
unobservable
valuation

inputs(3)(4)

 

Interrelationships
between valuation

inputs(5)

Derivatives, net:

             

Equity contracts

  ¥        (1)     Option models   Dividend yield   0.0 – 11.5%
  —     Higher fair value   No predictable interrelationship
    Volatilities   7.3 – 64.0%
  —     Higher fair value
      Correlations   (0.84) – 0.95
  —     Higher fair value  
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

    (53)    

DCF/

Option models

 

Interest rates

Volatilities

Volatilities

Correlations

 

0.2 – 3.0%

11.2 – 15.7%

28.0 – 71.2 bp

(0.67) – 0.98

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Credit contracts

    2    

DCF/

Option models

 

Credit spreads

Recovery rates

Volatilities

Correlations

 

0.0 – 122.1%

0.0 – 90.0%

35.0 – 83.0%

0.34 – 0.82

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

    27    

DCF/

Option models

  Interest rates
Volatilities
Volatilities
Correlations
 

0.2 – 2.6%

2.4 – 23.7%
237.0 – 280.0 bp
(0.25) – 0.80

 

—  

—  

 

—  

  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Loans and receivables

    70     DCF   Credit spreads   0.0 – 9.5%   4.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized agreements

    5     DCF   Repo rate   3.5%   3.5%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Other assets

             

Other(6)

    169     DCF  

WACC

Growth rates
Liquidity discounts

  11.4%
2.5%
10.0%
  11.4% 2.5% 10.0%   Lower fair value Higher fair value Lower fair value   No predictable interrelationship
   

 

 

 

 

 

 

 

 

 

 

 

    Market multiples  

EV/EBITDA ratios
PE ratios

Price/Book ratios
Liquidity discounts

 

3.3 – 7.8 x

7.5 – 126.4 x

0.0 – 2.2 x

10.0 – 30.0%

 

5.7 x

23.0 x

0.6 x 29.0%

  Higher fair value Higher fair value Higher fair value Lower fair value  

Generally changes in multiples results in a corresponding similar directional change in a

fair value measurement, assuming earnings

levels remain constant.

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

             

Short-term borrowings

    17    

DCF/

Option models

  Volatilities
Correlations
  7.3 – 50.9%
(0.84) – 0.95
 

—  

—  

  Higher fair value Higher fair value  

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized financing

    3     DCF   Repo rate   3.5%   3.5%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings

    429    

DCF/

Option models

  Volatilities
Volatilities
Correlations
 

7.3 – 50.9%

33.5 – 62.3 bp
(0.84) – 0.98

 

—  

—  

—  

  Higher fair value Higher fair value Higher fair value  

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
    December 31, 2018

Financial Instrument

  Fair
value in
billions
of yen
   

Valuation

technique

 

Significant

unobservable input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of increases
in significant
unobservable
valuation inputs(3)(4)

 

Interrelationships

between valuation

inputs(5)

Assets:

                                                                                                                                                                                                                   

Trading assets and private equity investments

             

Equities

  ¥ 16      DCF   Liquidity discounts   90.0%   90.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign government, agency and municipal securities

        DCF   Credit spreads   0.0 – 8.7%   0.7%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Bank and corporate debt securities and loans for trading purposes

    163      DCF   Credit spreads Recovery rates   0.0 – 29.7% 0.0 – 100.0%   5.4% 74.5%   Lower fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Real estate-backed securities

    103      DCF   Yields
Loss severities
  5.0 – 17.8% 0.0 – 55.2%   12.1% 5.9%   Lower fair value Lower fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations (“CDOs”) and other

    27      DCF   Yields Prepayment rates Default probabilities Loss severities   6.9 – 20.0% 20.0%
1.0 – 2.0% 40.0 – 100.0%
  14.6% 20.0% 2.0% 93.4%   Lower fair value Lower fair value Lower fair value Lower fair value   Change in default probabilities typically accompanied by directionally similar change in loss severities and opposite change in prepayment rates
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
    December 31, 2018

Financial Instrument

  Fair
value in
billions
of yen
   

Valuation

technique

 

Significant

unobservable input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of increases
in significant
unobservable
valuation inputs(3)(4)

 

Interrelationships

between valuation

inputs(5)

Derivatives, net:

                                                                                                                                                                                                                   

Equity contracts

    10      Option models   Dividend yield
  0.0 – 8.6%
  —     Higher fair value   No predictable interrelationship
    Volatilities
  10.3 – 79.0%
  —     Higher fair value
      Correlations
  (0.80) – 0.98
  —     Higher fair value
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

    (55)     DCF/
Option models
  Interest rates
Volatilities
Volatilities
Correlations
  0.1 – 2.8%
11.7 – 15.6%
26.5 – 73.0 bp
(1.00) – 1.00
  —  
—  
—  
—  
  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Credit contracts

    (10)     DCF/
Option models
  Credit spreads
Recovery rates
Volatilities
Correlations
  0.0 – 17.2%
0.0 – 104.0%
16.2 – 83.0%
0.23 – 0.81
  —  
—  
—  
—  
  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

    26      Option models   Interest rates
Volatilities
Volatilities
Correlations
  0.1 – 2.6%
3.0 – 27.5%
24.2 – 254.0 bp
(0.25) – 0.80
  —  
—  
—  
—  
  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Loans and receivables

    114      DCF   Credit spreads
  0.0 – 13.7%
  4.1%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized agreements

    10      DCF   Repo rate
  3.5 – 4.9%
  4.2%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Other assets

             

Other(6)

    159      DCF  

WACC

Growth rates
Liquidity discounts

  10.9%
2.5%
10.0%
  10.9%
2.5%
10.0%
  Lower fair value Higher fair value Lower fair value   No predictable interrelationship
   

 

 

 

 

 

 

 

 

 

 

 

    Market multiples  

EV/EBITDA ratios
PE Ratios

Price/Book ratios
Liquidity discounts

  4.7 – 15.1 x
9.8 – 29.1 x
0.4 – 2.6 x
10.0 – 50.0%
  7.9 x
15.2 x
0.7 x
30.9%
  Higher fair value Higher fair value Higher fair value Lower fair value   Generally changes in multiples results in a corresponding similar directional change in a fair value measurement, assuming earnings levels remain constant.
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

             

Short-term borrowings

  ¥ 43      DCF/
Option models
  Volatilities
Correlations
  10.3 – 68.5%
(0.75) – 0.89
  —  
—  
  Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized financing

        DCF   Repo rate
  3.5%   3.5%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings

    461      DCF/
Option models
  Volatilities
Volatilities
Correlations
  10.3 – 68.5%
24.2 – 68.9 bp
(1.00) – 0.98
  —  
—  
—  
  Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Range information is provided in percentages, coefficients and multiples and represents the highest and lowest level significant unobservable valuation input used to value that type of financial instrument. A wide dispersion in the range does not necessarily reflect increased uncertainty or subjectivity in the valuation input and is typically just a consequence of the different characteristics of the financial instruments themselves.

(2)

Weighted average information for non-derivative instruments is calculated by weighting each valuation input by the fair value of the financial instrument.

(3)

The above table only considers the impact of an increase in each significant unobservable valuation input on the fair value measurement of the financial instrument. However, a decrease in the significant unobservable valuation input would have the opposite effect on the fair value measurement of the financial instrument. For example, if an increase in a significant unobservable valuation input would result in a lower fair value measurement, a decrease in the significant unobservable valuation input would result in a higher fair value measurement.

(4)

The impact of an increase in the significant unobservable input on the fair value measurement for a derivative assumes Nomura is long risk to the input e.g., long volatility. Where Nomura is short such risk, the impact of an increase would have a converse effect on the fair value measurement of the derivative.

(5)

Consideration of the interrelationships between significant unobservable inputs is only relevant where more than one unobservable valuation input is used to determine the fair value measurement of the financial instrument.

(6)

Valuation technique(s) and unobservable valuation inputs in respect of equity securities reported within Other assets in the consolidated balance sheets.

 

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Table of Contents

Qualitative discussion of the ranges of significant unobservable inputs

The following comments present qualitative discussion about the significant unobservable valuation inputs used by Nomura for financial instruments classified in Level 3.

Derivatives—Equity contracts—The significant unobservable inputs are dividend yield, volatilities and correlations. The range of dividend yields varies as some companies do not pay any dividends, for example due to a lack of profits or as a policy during a growth period, and hence have a zero dividend yield while others may pay high dividends for example to return money to investors. The range of volatilities is wide as the volatilities of shorter-dated equity derivatives or those based on single equity securities can be higher than those of longer-dated instruments or those based on indices. Correlations represent the relationships between one input and another (“pairs”) and can either be positive or negative amounts. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships throughout the range.

Derivatives—Interest rate contracts—The significant unobservable inputs are interest rates, volatilities and correlations. The range of interest rates is due to interest rates in different countries/currencies being at different levels with some countries having extremely low levels and others being at levels that while still relatively low are less so. The range of volatilities is wide as volatilities can be higher when interest rates are at extremely low levels, and also because volatilities of shorter-dated interest rate derivatives are typically higher than those of longer-dated instruments. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships through the range. All significant unobservable inputs are spread across the ranges.

Derivatives—Credit contracts—The significant unobservable inputs are credit spreads, recovery rates, volatilities and correlations. The range of credit spreads reflects the different risk of default present within the portfolio. At the low end of the range, underlying reference names have a very limited risk of default whereas at the high end of the range, underlying reference names have a much greater risk of default. The range of recovery rates varies primarily due to the seniority of the underlying exposure with senior exposures having a higher recovery than subordinated exposures. The range of volatilities is wide as the volatilities of shorter-dated credit contracts are typically higher than those of longer-dated instruments. The correlation range is positive since credit spread moves are generally in the same direction. Highly positive correlations are those for which the movement is very closely related and in the same direction, with correlation falling as the relationship becomes less strong.

Derivatives—Foreign exchange contracts—The significant unobservable inputs are interest rates, volatilities and correlations. The range of interest rates is due to interest rates in different countries/currencies being at different levels with some countries having extremely low levels and others being at levels that while still relatively low are less so. The range of volatilities is mainly due to the lower end of the range arising from currencies that trade in narrow ranges e.g. versus the U.S. Dollar while the higher end comes from currencies with a greater range of movement such as emerging market currencies. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships through the range.

Short-term borrowings and Long-term borrowings—The significant unobservable inputs are yields, prepayment rates, default probabilities, loss severities, volatilities and correlations. The range of volatilities is wide as the volatilities of shorter-dated instruments are typically higher than those in longer-dated instruments. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships through the range.

 

48


Table of Contents

Movements in Level 3 financial instruments

The following tables present gains and losses as well as increases and decreases of financial instruments measured at fair value on a recurring basis which Nomura classified in Level 3 for the nine and three months ended December 31, 2017 and 2018. Financial instruments classified in Level 3 are often hedged with instruments within Level 1 or Level 2 of the fair value hierarchy. The gains or losses presented below do not reflect the offsetting gains or losses for these hedging instruments. Level 3 financial instruments are also measured using both observable and unobservable valuation inputs. Fair value changes presented below, therefore, reflect realized and unrealized gains and losses resulting from movements in both observable and unobservable valuation inputs.

For the nine months ended December 31, 2017 and 2018, gains and losses related to Level 3 assets and liabilities did not have a material impact on Nomura’s liquidity and capital resources management.

 

    Billions of yen  
    Nine months ended December 31, 2017  
    Beginning
balance as of
nine months
ended
December 31,

2017
    Total gains
(losses)
recognized
in net
revenue(1)
    Total gains
(losses)
recognized in
other
comprehensive
income
    Purchases /
issues(2)
    Sales /
redemptions(2)
    Settlements     Foreign
exchange
movements
    Transfers
into
Level 3(3)
    Transfers
out of
Level 3(3)
    Balance as of
nine months
ended
December 31,
2017
 

Assets:

                   

Trading assets and private equity investments

                   

Equities

  ¥ 34     ¥ 1     ¥ —       ¥ 20     ¥ (37   ¥ —       ¥ 1      ¥ 8     ¥ (3   ¥ 24  

Private equity investments

    13       0       —         0       (8     —         1       0       (3     3  

Japanese agency and municipal securities

    1       0       —         —         0       —         0       —         —         1  

Foreign government, agency and municipal securities

    3       1       —         69       (73     —         0       4       (1     3  

Bank and corporate debt securities and loans for trading purposes

    108       9       —         118       (92     —         1       13       (9     148  

Commercial mortgage-backed securities (“CMBS”)

    1       0       —         5       (2     —         0       —         (2     2  

Residential mortgage-backed securities (“RMBS”)

    0       0       —         2       (2     —         0       —         —         0  

Real estate-backed securities

    41       1       —         78       (39     —         0       —         —         81  

Collateralized debt obligations (“CDOs”) and other

    27       (8     —         40       (38     —         0       6       (4     23  

Investment trust funds and other

    0       0       —         2       (3     —         0       2       0       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading assets and private equity investments

    228       4       —         334       (294     —         3       33       (22     286  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives, net(4)

                   

Equity contracts

    (6     (3     —         —         —         0       0       5       0       (4

Interest rate contracts

    (22     13       —         —         —         8       0       (6     (27     (34

Credit contracts

    (10     (1     —         —         —         7       0       (2     0       (6

Foreign exchange contracts

    23       (4     —         —         —         (2     1       (2     1       17  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives, net

    (15     5       —         —         —         13       1       (5     (26     (27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

  ¥ 213     ¥ 9     ¥ —       ¥ 334     ¥ (294   ¥ 13     ¥ 4     ¥ 28     ¥ (48   ¥ 259  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and receivables

    66       (14     —         34       (43     —         0       21       —         64  

Collateralized agreements

    5       0       —         —         —         —         0       —         —         5  

Other assets

                   

Other

    163       14       0       0       (2